Targa Resources' Almost Deal Shows just How Hot Midstream Pipeline Assets Are Now

06/20/2014 3:40 pm EST

Focus: MLPS

Jim Jubak

Founder and Editor, JubakPicks.com

Yesterday, talks ended without an acquisition deal for this MLP and the stock was down today as a result, but MoneyShow's Jim Jubak isn't positive the deal is dead and thinks it illustrates that MLPs are on fire.

Soar on the acquisition rumor. Plunge on the acquisition denial.

Yesterday, Targa Resources Partners (NGLS) climbed 18% on a Bloomberg story that said the MLP and Targa Resources (TRGP), the general partner, would be acquired by Energy Transfer Equity (ETE) for a total of $15 billion.

Today, on news that talks had ended without a deal, Targa Resources Partners was down 10.72% as of 12:30PM New York time.

(I'm concentrating on Targa Resources Partners because the MLP (master limited partnership) is a member of my Dividend Income Portfolio. The units, which yield 4.24%, are up 85.96% since I added them to the portfolio on January 11, 2013.)

I'm not sure that the deal is dead. Energy Transfer Equity, a pipeline MLP that controls 56,000 miles of pipelines, could come back with a more attractive offer. The initial Bloomberg story speculated that the deal would total $15 billion but that the price might be as high as $17 billion.

What this example does indicate is how hot midstream pipeline assets are right now. The Targa talks follow hard on the heels of the $6 billion deal to gain control of Access Midstream Partners by the Williams Cos. Midstream pipeline companies are busy building out new pipelines as the US shale boom requires new infrastructure to move natural gas, natural gas liquids, and oil in non-traditional patterns.

If I take the market cap neighborhood of Access Midstream ($11.4 billion) and Targa Resources ($8.5 billion) as the current definition of an attractive size for deals (big enough to make an impact on the financials of the acquiring company and small enough to be reasonably easy to finance in the current cheap money market), then I get a small roster of midstream pipeline assets that might be acquisition targets. The list includes Western Gas Partners (WES) and DCP Midstream Partners (DPM) at market caps of $8.8 billion and $6.2 billion, respectively. Another midstream asset, Tallgrass Partners (TEP) might be too small to hit the hottest spot for a deal in this market at $1.6 billon in market cap.

To me, the most attractive of these candidates for new money is DCP Midstream. (Partly that's because I already own Western Gas Partners in my Dividend Income Portfolio. The units are up 68.8% since I added them to that portfolio on July 3, 2012.)

DCP Midstream's pipelines, and processing and storage facilities reach Colorado's Front Range, and Texas' Permian Basin and Eagle Ford production regions. The MLP units yield 5.18%. The units had a tough 2013 on falling prices for natural gas liquids but have recovered nicely in 2014.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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