On May 15th, ONEOK (OKE) and Magellan Midstream Partners (MMP) agreed to a deal merging the Tulsa-based firms. A shareholder vote is expected in the back half of 2023 and would create one of the largest pro-forma energy infrastructure entities. We believe the current deal spread based on ONEOK and Magellan Midstream Partners stock prices implies that the deal is more likely than not to be approved and close in 2023.
On August 16th, Energy Transfer LP (ET) announced it entered an agreement to acquire Crestwood Equity Partners (CEQP). The all equity transaction is tax-efficient for CEQP unitholders. This agreement is subject to a vote of CEQP unitholders expected in the fourth quarter of 2023.
The ramifications of these potential transactions are wide-ranging. We first wrote about midstream M&A implications in June 2023. In an update to our first writeup, we cover macro takeaways, specifically the continued move away from MLPs towards C-Corps.
In the video below, Mark Marifian explains deal, its implications and fallout for investors
At the end of 2022, Alerian MLP Infrastructure Index (AMZI) constituents, which consist of midstream MLPs, had a market cap of $210 billion and a float adjusted market cap of only $112 billion. The Tortoise North American Pipeline IndexSM (TNAP), which consists of MLPs and C-Corps had a market cap of $624 billion and a float adjusted market cap of $501 billion. The $501 billion is almost 5x the market cap of MLPs! This ratio will only be further exacerbated by the pending MLP acquisitions.
In fact, should the four pending transactions close, the number of constituents in the AMZI would fall to just 11. Given the trend of MLPs being acquired over the past decade, have energy infrastructure investment products realigned their investment strategies to reflect a narrower opportunity for MLPs?
We believe a mismatch remains. Of the $32.4 billion in structured products, just $11.5 billion (34%) of the energy infrastructure investment product is in regulated investment company (RIC) structured funds. The remaining 66% of energy infrastructure product is in C-Corp structured funds or exchange-traded notes (ETNs) which track MLP-focused indices. Again, that is opposite of the market cap of companies in the universe! While some C-Corp funds may own non-MLP holdings, C-Corp funds are predominantly invested in the narrow subset of MLPs remaining today.