3 Energy Takeover Targets

07/07/2015 9:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

The depressed energy price environment is finally starting to spur takeover bids in the oil and gas industry, observes Marshall Hargrave of Investors Alley.

But it isn't the oil exploration industry, where many people were expecting it. Rather, it's the midstream pipeline space.

The big news is that Energy Transfer Equity (ETE) made a move to buy Williams Companies (WMB), offering upwards of $53.1 billion, roughly $64 a share. However, Williams has called this bid too low.

What's more is that other larger players could find Williams Companies interesting, such as Enterprise Products Partners (EPD), Kinder Morgan (KMI), or TransCanada (TRP).

And if they don't find Williams Companies interesting, they could find that other major players are worth buying.

Bigger is better in the MLP industry, so we could see an additional wave of consolidation as major players look to expand their geographical reach and scale.

This is becoming more and more important, as building new pipelines in the US is becoming increasingly difficult.

Here are our top three choices for midstream takeover targets that are worth much more than their current share prices. 

Oneok Inc. (OKE)

First up is Oneok, which is a major player in the natural gas pipeline business.

Oneok is enticing since it's a pure play general partner of Oneok Partners (OKS), which comes after spinning off its regulated utility business last year.

The real appeal to a buyer, however, could be Oneok's entrenched system of gathering and processing natural gas liquids.

Basically, its gathering, processing, and pipeline businesses are all interconnected, which allows Oneok to enjoy speed and low-costs when it comes to moving NGLs.

Targa Resources (TRGP)

Targa Resources Corp is the general partner of Targa Resources Partners (NGLS). It makes its money via processing and transporting natural gas.

The appeal to Targa is its potential for expansion, which is a focus at the company. With a $5.2 billion market cap, it's a bit easier to swallow up.

The big appeal for Targa is its recent deal for Atlas Energy, which is expected to generate $1 billion in organic projects over the next couple years, driving cash available for distribution higher over the interim.

Targa already has a strong presence in the Permian basin, but with Atlas' assets it's a much more enticing target, where it now has exposure to the Mississippi Lime and Woodford basins.

Markwest Energy Partners (MWE)

Markwest is third on the list, with a close to $12 billion market cap; it's quite the prize. It's very enticing, with a strong position in the Marcellus shale and plans to tap into the Utica shale.

With this new focus on the shale plays, Markwest expects its fee revenues (read: steady revenues not tied to oil or gas prices) to go from about 40% of total revenues to 70%.

It merged with its general partner some seven years ago, so it's not a re-consolidation story, yet, being one of the few MLPs that pay out 100% of its distributions to common unit holders, it's still attractive.

From a buyout standpoint, the shift toward steady fee revenues is a positive, where back in 2008, only about a quarter of its revenues were fee-based.

Pipelines have long been hailed as the boring, yet safe, investments in the oil business. But the industry is heating up, with more to come.

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