John Goodgame Quoted in Law360 on MLP Consolidation
John Goodgame, a partner in Akin Gump’s oil and gas practice, was quoted in the Law360 article “Consolidations Show Energy MLP Growth Isn’t Forever,” which looks at the recent shift among many oil and gas companies to merge or absorb their master limited partnerships (MLPs).
The article sites several examples of companies making such moves. Goodgame told the publication, “One of the things that all those [MLP] sponsors have said is that it ultimately reduces the cost of capital, it makes the combined entity more competitive for assets and able to buy assets in a way that’s accretive.”
Goodgame said many of the MLPs reunited with their sponsors had incentive distribution rights (IDRs) in the 50 percent range, meaning that for every dollar of additional cash they generated, 50 percent went to the general partner and 50 percent to the limited partners. At that point, “it’s hard to continue to grow the MLP in a way that’s accretive to the limited partners in a market like today, when there’s so much capital chasing midstream assets. Once MLPs get to that higher tier, sponsors have to think about whether the MLP can still compete to acquire good assets at good prices.”
Falling oil prices have only increased the pressure on MLP sponsors to make these moves, with Goodgame pointing out that the revenues of an oil or gas gathering system depend on drilling activity: “In the short run, you will continue to get paid, but over the longer term, if you are in an area where drilling is slowing down, your volume is going to reduce. That ultimately affects the costs of capital.”
The recent consolidations and reabsorptions of MLPs, Goodgame added, are possible endgames for the traditional, sponsored MLPs in the oil and gas industry, which had a big boost in the past decade amid the shale boom. The current situation, he added, is “an indication that the industry has become mature. It's been around for a while, it’s no longer new.”