The year 2011 marked 12 months of game-changing events in domestic energy production and transportation, as companies across the globe continued to provide significant capital to develop North American oil and gas shales. More than $30 billion was invested in shale-related acquisitions in 2011, following over $80 billion in 2009 and 2010.This large-scale global investment focus validated the tremendous oil and gas resource production anticipated within our borders, as a result of technology improvements and new supply sources.
A Pipeline of Growth
The growing production of our domestic resources will provide what we believe to be unprecedented growth opportunities for midstream energy transportation companies. Substantial pipeline infrastructure is needed to take energy from new areas of expanding supply to growing areas of demand. Tortoise estimates over $23 billion was invested in 2011 and an additional $42 billion will be invested through 2014 on pipeline infrastructure projects. These are not “build it and they will come” type endeavors, but are generally identified and committed projects, with long-term user contracts in place.
In addition to new build-out projects, acquisition activity also remained elevated with a record $76 billion in master limited partnership (MLP) and pipeline c-corporation acquisitions announced in 2011. The biggest announced deal of the year, Kinder Morgan Inc.’s pending acquisition of El Paso Corporation, would create the largest midstream company and the fourth-largest energy company in North America. In our view, the deal further confirms the essential role of natural gas in America’s future. Similarly, the second-largest announced transaction of 2011, Energy Transfer Equity’s pending bid for Southern Union, confirmed the potential value in linking increased supply with demand centers.
The capital markets supported midstream companies in their growth initiatives through continued access to capital to support the significant uptick in announced acquisitions and growth projects. In 2011, MLPs alone issued more than $40 billion of new capital, over two-thirds of which was issued by pipeline MLPs. The pace of IPOs picked up as well, with 14 IPOs raising more than $5 billion during the year, including eight midstream companies.
Fundamentals Remained Important
Macroeconomic events dominated the headlines in 2011, as Eurozone debt concerns, the U.S. sovereign debt downgrade and slower-than-anticipated economic growth, generated uncertainty (and its cousin, price volatility) in all markets – including energy. Fortunately, the market recognized quality over longer periods, as evidenced by the performance of energy infrastructure companies compared with the broader equity market (see chart).
We attribute the strong performance of midstream energy companies to a number of factors:
The underlying business fundamentals of midstream energy infrastructure remained intact, with companies well positioned by strong balance sheets;
- The supply and demand for energy hydrocarbons, including crude oil, natural gas and natural gas liquids grew throughout the year;
- The Fed’s Operation Twist guided Treasury yields ever lower, boosting performance of dividend-paying equities;
- North American pipeline companies (particularly pipeline corporations) benefited from heightened actual and anticipated acquisition activity; and
- A proliferation of newly announced energy infrastructure internal growth projects accelerated growth potential.
2012 Outlook
Despite what may be a slow-growth economic environment, we believe midstream energy infrastructure companies enjoy several tailwinds. First and foremost, their businesses are anchored in providing an essential service that impacts our daily lives. The relatively inelastic demand for energy should continue to generate long-term stability across various economic conditions for the midstream energy transporters.