Surging shale spawns new financing for energy
We think the market is ripe.
HOUSTON: Strong demand for shale oil-and-gas infrastructure is giving rise to an important new financing vehicle for pipeline, processing and storage ventures that are needed to get more shale fuels to market.
So-called special purpose acquisition companies, or SPACs, seek to fill the gap left by the declining use of master limited partnerships, which historically have helped finance such capitalintensive midstream projects.
US crude output is expected to rise 4.5 per cent this year and another 7.5 per cent in 2018, to about 10 million barrels per day, eclipsing a 47-year-old record.
Without hefty infrastructure investments – about US$30 billion a year through 2020, according to Tortoise Capital Advisors – that increased flow could face a bottleneck.
As the 2015 oil-price decline lowered US output, energy MLPs failed to deliver promised growth and returns, shutting off one key source of investment.
Between 2011 and 2014, 60 energy MLPs went public, raising about US$23 billion in total proceeds.
Since then, only a dozen have done so, according to the MLP Association, a Washington-based trade group. Those offerings raised about US$6 billion.
SPACs offer a way to do large deals for existing companies whose private-equity owners want to sell or who need cash for expansion.
SPACs raise money from institutional and retail investors – who invest without knowing what will be acquired – then go shopping for deals.
Unlike MLPs, SPACs pitch investors on the credentials of their
Jim Baker, Kayne Anderson Capital partner
veteran management teams rather than the companies in their portfolios.
Investors in SPACs gamble that the executives can find a deal at a suitable price.
Rising shale output and falling investments in MLPs have whetted appetites for new financing alternatives to fuel the growth of oil firms.
“We think the market is ripe,” said Jim Baker, a partner at Kayne Anderson Capital, which created the first energy-infrastructure SPAC in April.
Its SPAC raised US$377 million through an initial public offering to hunt for large infrastructure businesses in US shale basins.
“There are a lot of private-equity-backed midstream companies that ultimately need to exit and find a long-term home,” said Robert Purgason, chief executive of Kayne Anderson Acquisition Corp, as the SPAC is called.
Purgason is a former executive with pipeline operators Crosstex Energy and Williams Cos, and he led Chesapeake Midstream Partners through an IPO.
At Williams, he ran a business that provided fuels transportation for producers including Anadarko Petroleum, Royal Dutch Shell and Total.
Kayne Anderson Acquisition expects to build its war chest to buy midstream companies to between US$1.5 billion and US$2 billion through a combination of borrowing and convincing private equity owners to hold stock in any deal.
It hopes to have at least one deal in hand before year-end, Purgason said.
Earlier SPACs have focused on buying shale producers instead of storage and transportation firms.
Silver Run Acquisition I raised US$500 million in early 2016 and months later bought closely-held Centennial Resource Development for about US$1.4 billion in cash.
That deal’s success – investors in the IPO have received a 47 per cent return in the last year – spawned several copycats this year.
SPACs have an advantage in the current market because of their potential to compete for larger deals than private equity buyers and their ability to use cash and equity.
“There are a lot of assets for sale on the midstream side,” said Brian Kessens, a managing director at Tortoise Capital, which specializes in energy investments and MLP-backed mutual funds.
“For the larger assets, there aren’t a lot of larger buyers.” Master limited partnerships originally won favour among income-seeking retail investors because they are tax-advantaged partnerships that pay profits to individual owners and aren’t required to pay corporate income taxes.
Over time, MLPs are designed to pay the general partner who sets up a business a larger share of its earnings via distributions, similar to dividends, which in turn shrinks the share of future payouts to retail investors. — Reuters