Oil and gas riches continued to funnel through the midstream world during the first half of 2013, though the upstream and downstream worlds weren’t quite as fortunate. As activity and deal value in other sectors slowed, the midstream space continued to outperform, showing a sizable increase in the value of transactions, according to a new Deloitte report.

And Deloitte’s A Quiet Deal Market Follows Brisk End-of- Year Activity says that midstream activity is expected to hold steady as demand for North American infrastructure rises.

“It continues to grow and be one of the bright spots of the overall oil and gas industry,” Roger Ihne, a principal at Deloitte Consulting LLP, tells Midstream Business.

“It really looks to be positioned well. From our perspective, if you just look at the amount of investment that’s going to be required in midstream—particularly in the U.S. and Canada— it has a bright future. The volumes are going to be continuing to increase over the next several years.

Through that growth phase, the amount of capital that’s going to be deployed around that infrastructure continues to be strong. That should support a lot of M&A [merger and acquisition] activity as well,” Ihne says.

Declines, up and down

The midstream was the only sector to observe an increase in total deal value during the first half. Its total deal value for the six-month period was $25.1 billion, a rise from $18.7 billion during the first half of 2012.

In the overall oil and gas sector, deal values fell 29% during the first half of 2013, Deloitte says. It notes that just 10 deals were valued at more than $2 billion during the past six months.

The midstream space is seeing the most success as the industry transitions into the “harvesting phase” of activity in new shale plays, Ihne says. As a result, there’s been aflurry of M&A and investment activity as build-out intensives. Of course, this bodes well for North American midstream companies. The increase of gas and oil volumes is also playing a role in infrastructure spending, says Ihne.

“We see that trend continuing for several years,” he says. “It’s not until 2016 or 2020 that volumes are expected to plateau or assume a more historically normal growth rate in volumes. Once that plateaus, there will probably be more equilibrium in that part of the industry.”

MLP strength

Master limited partnerships (MLPs) accounted for six of the largest midstream deals during the January-to-June timeframe. They’re expected to remain the strongest contributors moving forward as well.

“MLPs are still the dominant players,” Jed Shreve, a principal with Deloitte Financial Advisory Services LLP, says in the report. “Some integrated companies are forming MLPs. We expect to see healthy volume continue in this space, whether it comes from MLPs consolidating or integrated companies creating new MLPs to maximize valuations.”

Dana McGinnis, who owns the San Antonio-based investment firm Mission Advisors, which manages the McGinnis MLP fund, says he has noticed some emerging trends in the MLP sector.

“There is an accelerating trend to spin off MLP qualified assets because of growing investor demand and synergistic efficiencies of such split ups,” he tells Midstream Business.“In addition, more energy sectors are seeking to qualify as MLP structures to take advantage of the demand.”

Speaking on the cautionary side, McGinnis says it is possible that growth rates in the future could slow because of over production. Demand, meanwhile, could slow because of a weak economy burdened by debt, regulation and poor policies coming from Washington, D.C., he says.

“Specific to the energy sector, the alternative-energy mandates of both state and federal governments have cost federal taxpayers and local ratepayers billions of dollars subsidizing wind and solar projects that produce little energy and even less of that on demand, when it is really needed. Focusing on alternative energy threatens the ability of electric utilities to finance gas or coal-fired capacity which, barring new nuclear plants, is the only means to satisfy future power demand.”

Project financing

Right now, most midstream deals are being financed through a combination of equity and debt, says McGinnis. The ways in which projects are funded depends on a number of factors, he says, including the judgment of management and an issuer’s ability to repay debt or increase distributions.

McGinnis believes the sector will remain strong at least until the U.S. becomes completely energy independent. Its strength could carry on beyond that should more liquefied natural gas and crude export projects be approved, he says.

“In almost any case, the U.S. energy industry has a very bright future and because of it, the U.S. has the very real potential to dominate the world economy in both energy and manufacturing as never before.”

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