Following a flurry of M&A deals among oil drillers and producers – particularly in and around the prolific Permian Basin – dealmaking has now shifted to the midstream sector, where companies operate the pipelines and gathering or transmission facilities that move the crude or gas from the wells to homes or businesses.

In 3Q24, midstream M&A activity outpaced upstream deal activity, according to Houlihan Lokey’s latest Oil and Gas Market Update.

Dealmaking was partly driven by strategics like ONEOK [NYSE:OKE] and Energy Transfer [NYSE:ET] acquiring sponsor-backed midstream systems. “Expect more strategic acquisitions of well-placed, attractive, PE-backed infrastructure systems,”  said J.P. Hanson, managing director and global head of Houlihan’s Oil & Gas group.

Deal volume for sponsor-led midstream exits year to date total USD 7.3bn – 85.8% more than in all 2023 and the second-highest amount since 2019, according to Mergermarket data.

In July, Dallas-based Energy Transfer completed its takeover of Stonepeak Infrastructure Partners-backed WTG Midstream for USD 3.1bn. And last month, Tulsa, Oklahoma-based ONEOK closed its acquisitions of Global Infrastructure Partners-backed EnLink Midstream and Medallion Midstream for a combined USD 5.9bn.

“We continue to see consolidation by the large independent players,” said Hanson.

Decompressing multiples

One reason behind the uptick in sponsor-led midstream exits is that the bid-ask spread is getting more workable now, said an executive at a midstream company.

Before 2021, multiples for midstream assets in the Appalachia Basin, the second largest gas field in the world, were 7x-9x EBITDA, but are now down to 6x-8x, this executive said.

Summit Midstream’s [NYSE:SMC] USD 450m acquisition of Tall Oak Midstream III from Tailwater Capital valued the midstream company at about 5.6x expected adjusted EBITDA for 2025, as reported. Summit Midstream currently trades around 7x.

It is also easier for companies looking to expand their midstream footprint to buy PE-backed assets that are already operating rather than building them themselves due to challenges associated with permitting and rights of way from landowners, the midstream executive said.

Donald Trump’s government is expected to cut back on some of the permitting red tape making greenfield midstream investments more feasible, said an energy investment banker, adding that historically Republican administrations have been beneficial to the sector.

On 16 November, Trump announced he will be nominating Chris Wright, CEO of fracking services company Liberty Energy [NYSE:LBRT] as Energy Secretary. “Chris was one of the pioneers who helped launch the American Shale Revolution that fueled American Energy Independence,” Trump said.

Denver-based Liberty Energy pumps water and sand underground to frack customers’ wells.

Most midstream permitting, however, takes place at the state level and is not necessarily impacted by a change in administration, as Mergermarket reported in September.

AI jockeying 

Trump’s Energy Department will have the authority to approve most exports of liquefied natural gas (LNG). In fact, his government is widely expected to lift a pause on new LNG exports imposed by Joe Biden’s administration.

“Natural gas is considered a cleaner fuel than oil and coal with significant applications. For example, natural gas is being used more and more to power data centers to ensure a reliable and sustainable power source,” said James Garrett, chair of Latham & Watkins’ Houston corporate department and a member of the firm’s Private Equity and mergers & Acquisitions practices.

The energy mix in Northern Virginia, which houses data centers through which about 70% of global internet traffic passes, was 63.3% natural gas and 25.3% nuclear as of July 2024, whereas the national average was 48.6% natural gas, 16.2% nuclear, according to data from the US Energy Information Administration.

“If the US is going to win the (generative artificial intelligence) arms race, it is going to have to adopt an energy mix that facilitates the quickest way to winning that arms race,” said Dan Romito, managing director at energy-focused financial services platform Pickering Energy Partners. “We need to double the production of natural gas… We need to start gobbling up assets.”

Kinder Morgan [NYSE:KMI] expects the US natural gas market to grow by 25bn cubic feet per day – or nearly a quarter of the country’s current marketed production – over the next five years amid rising exports, new power demand (including from data centers) and industrial reshoring, according to data, analytics, indexing and digital distribution firm VettaFi Holdings.

In July, Houston-based Kinder Morgan announced an expansion to the Southern Natural Gas pipeline system to help meet growing power demand in the Southeast.

The International Energy Agency projects that crypto mining and data centers will demand 3.5% of the world’s electricity in three years, up from 2% in 2022.

“Who would’ve thought that technology companies were going to be the ones who probably end up lobbying the federal government to focus on gas production for gas-fired combined cycle base load power generation as a solution for AI growth because nuclear can’t get there fast enough,” said Jason Downie, co-founder and managing partner at Dallas-based Tailwater Capital.

PE firms are taking advantage of this to monetize their midstream assets.

“There are a number of PE funds holding midstream investments past their funds typical hold period, with such investments being actively marketed, or expected to be marketed in the coming year,” said Latham & Watkins’ Garrett.

Some midstream sellers are negotiating directly with strategics instead of launching competitive processes, said the midstream executive.

Mergermarket reported earlier this week that over the last five years, strategics have been playing an increasingly dominant role in North American midstream M&A.