SAN ANTONIO, Texas— A pattern of large public companies buying up strategically located independents—especially in the Permian Basin—will likely continue in the midstream M&A market, even as the pool of candidates continues to shrink, said a panel of experts.

Larger public midstream companies are generally in healthy fiscal shape and have more options when it comes to financing deals in a competitive market, and there are still plenty of smaller operations available, said Aaron Blomquist, partner and co-head of infrastructure investment banking at TPH & Co., at the GPA Midstream Association Convention on Sept. 24.

“There’s still a lot of opportunity to invest,” said Jen Kneale, Targa Resources’ president of finance and administration.

Companies still interested in growth will be much pickier about finding an asset that fits well into the buyer’s overall strategy, though. The midstream market has changed significantly since the 2010s when many companies primarily focused on acquiring assets, Kneale said.

Blomquist said 111 private equity-sponsored midstream companies currently operate in the U.S. The latest era of consolidation in the last few years has shrunk the pool of independents, but the number is still historically high.

Before the 1990s, most assets were built by production companies. The independent sector saw rapid growth during the shale revolution, hitting a high of 163 independents just four years ago.

“Why has the number gone down between 2020 and currently? It’s really that a lot of these have been consumed in consolidation,” Blomquist said.

For the first half of this decade, selling, rather than staying private, have often made more sense for small operators, Blomquist said. Independent midstream companies are in a market where their assets are highly valued, but getting private equity has become more difficult.

Several factors have driven away private investors, Blomquist said. The backers of some equity firms have requested a faster return on their investments and some firms have become skittish about investing in an historically volatile industry. And, the ESG movement drove some firms away from the petrochemical industry.

Blomquist said he anticipated that the private equity market would eventually rebound from its current lows, considering the overall sector’s financial health.

Blomquist pointed to ONEOK’s $2.6 billion acquisition of Medallion Midstream at the end of August. Medallion owned the largest private crude pipeline network in the Permian. ONEOK bought Medallion at 6.3X the estimated market EBITDA.

“That allows the existing private sponsor to be able to sell their businesses at a profit, at a value that they feel good about,” Blomquist said.

TP&H has tracked about $24 billion in midstream corporate M&A so far in 2024. The firm expects an elevated pace of consolidation to continue for about four years. After that, the market is difficult to predict, Blomquist said.

“What our experience would say is that a lot of times it feels like it's going to be busy for the next few years, and it ends up being really busy for a long time,” Blomquist said. “Our industry is very dynamic, and I'm sure that it will re-invent itself.”

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