There’s plenty of news on the midstream front as E&Ps announce their intent to monetize gathering, processing and pipeline asset value. Potential buyers are led by private equity firms that focus on energy infrastructure and have raised substantial capital in recent years, according to a recent report from Morgan Stanley Research.

The impetus for E&Ps to make the most of their midstream assets is wrapped up in the premium valuations achieved, particularly when they are sold outright; the resulting reduced business complexity; and de-levering opportunities for E&Ps still recovering from the downturn.

Some examples are Apache, which is partnering with Kayne Anderson Acquisition Corp. to create Altus Midstream Co. around the E&P’s Alpine High holdings; Occidental Petroleum Corp., which is selling a storage and export terminal and pipelines and a gathering system to EnCap Flatrock Midstream portfolio companies; and Devon Energy Corp., which sold its ownership interests in EnLink Midstream Partners and EnLink Midstream LLC to Global Infrastructure Partners. More such deals are expected.

In a recent report, analysts from Morgan Stanley noted this monetization trend and looked at which stocks could benefit from “the E&P quest to return capital and drive material value uplift.” They noted that the Oxy deal, with its high multiples, should deliver “meaningful cash proceeds and sum-of-the-parts (SOTP) upside,” but that Apache’s deal would “do little to raise cash or alleviate ongoing capex needs.”

They identified two main factors driving potential sales of midstream holdings by E&Ps. First, independents want to bring in cash for buybacks, and now that many have sold non-core upstream assets, midstream assets are the next “prime candidates,” the analysts said.

Second, they note, midstream assets that are standalone entities generally trade at much higher multiples than upstream holdings. “However, our analysis shows that E&Ps with significant midstream exposure rarely trade at full sum-of-the-parts value. OXY’s announcement yesterday clearly highlights this disconnect, with its midstream sale transacting at about 14.4 x EV/EBITDA, while the stock trades at only about 5.0x our 2019 estimate.”

Devon’s deal with EnLink bears out the analysts’ expectation that strategic separations via outright monetizations yield the best outcome for E&P shareholders, while minimizing negative impacts to the NLP, according to the report. Spinoffs, on the other hand, “appear to often have negative initial impacts.”

For the midstream names under their coverage, the Morgan Stanley analysts’ study found that most would achieve material SOTP value upside if they sold midstream assets, “albeit with meaningful individual considerations”—but, again, they noted that Apache is an exception, as its Alpine asset deal brings in no cash proceeds. Those that appear attractive on a SOTP analysis are OXY, Anadarko Petroleum, EQT, Hess, Noble and Oasis, according to the report.

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