The merger and acquisition scene for midstream players picked up abruptly as the fall began, with more deals announced in the first half of October than all of September. Midstream operators announced at least 15 separate acquisitions in the first three weeks of October, compared with two in September.

By far the largest acquisition in October was the announcement by Kinder Morgan Inc. that it would acquire El Paso Corp. in what will become the largest pipeline company in North America with about 80,000 miles of pipelines. The total value of the acquisition will be about $38 billion, including $20 billion in equity and about $18 billion in debt.

The combined businesses and their associated master limited partnerships (MLP), if approved by shareholders and regulators, will represent several milestones for the U.S. energy market: the largest natural gas pipeline network, the largest independent transporter of petroleum products, the largest transporter of carbon dioxide and the largest owner and operator of terminals.

El Paso was attractive to Kinder Morgan because its assets are primarily regulated interstate natural gas pipelines that produce stable cash flows and have access to key supply regions and major markets.

In addition, the natural gas pipeline systems of the two companies are very complementary, as they primarily serve different supply sources and markets in the U.S. The acquisition is valued at $26.87 per share, a premium of 37% over the closing price of El Paso Corp. on October. 14, 2011.

Analysts quickly embraced the deal and said regulators will likely approve it. Brad Olsen, an analyst with Tudor Pickering Holt & Co., upgraded Kinder Morgan Inc. to a "buy" and pushed up its target price to $34. He raised the target price for Kinder Morgan Energy Partners LP to $78 per unit, from its previous target of $68.

The transaction is expected to close in the second quarter 2012, assuming the regulators approve it. Upon closing, Kinder Morgan shareholders are expected to own 68% of the combined company and El Paso shareholders will hold the remainder.

Following closing, El Paso will become a subsidiary of Kinder Morgan, which will then sell off the exploration and production assets of El Paso. (El Paso had already announced plans to split the company into its upstream and midstream components).

Kinder Morgan will also drop down all of El Paso natural gas pipeline assets to Kinder Morgan Energy Partners, its MLP. At that point, about 80% of Kinder Morgan's cash flow is expected to come from the general partner interests and the remainder from its limited partner interests.

The debt and equity markets in the midstream sector showed the opposite trend, after a flurry of deals announced in September fell to a trickle in the first two weeks of October. Midstream operators announced a total of six deals totaling $1.6 billion in September, but only reported one deal worth $209 million in October. In that deal, Dallas-based Regency Energy Partners LP announced an underwritten public offering of 10 million common units representing limited partner interests at $20.92 per unit.

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