“Consolidation” the New Theme for U.S. Energy Sector

A wave of consolidation across the U.S. energy sector continues to hold center stage. In a string of recent M&A deals, the latest to go under the hammer is the much-anticipated deal between Western Gas Equity Partners (WGP, $30.97) and Western Gas Partners (WES, $46.91) – wherein the former has agreed to acquire affiliate Western Gas Partners in an all-equity deal to create a single, simplified midstream company.

The above-mentioned transaction consolidates two midstream entities controlled by U.S. oil giant Anadarko Petroleum (APC, $57.79), which will retain a majority stake in the company. Further, in addition to this deal, Anadarko Petroleum has also announced to sell its remaining midstream assets to Western Gas for $4.015 billion, funded with 50% cash and 50% equity.

This deal will not just transform Western Gas into a stronger midstream company that's better positioned to capture future expansion opportunities and deliver sustainable distribution growth. It is also expected to boost Western Gas' cash flow per unit by 10% to 20% each year from 2019 to 2021, enabling the company to increase its distribution to unit-holders by 6% to 8% in 2019.

The other big improvement for the company would be it’s distribution coverage ratio, which is expected to expand from a tight 1.0 times in 2018 up to a more comfortable 1.2 times in 2019 -- before further increasing to more than 1.3 times in the future. This move not only puts the company's high-yielding payout on more sustainable footing, it's also expected to provide the company with more retained cash flow, which can help in funding future expansion opportunities.