NEW YORK (TheStreet) -- Energy Transfer Equity (ETE won over reluctant pipeline company Williams (WMB - Get Report) with a $37.7 billion offer. The markets, though, did not celebrate Energy Transfer's victory, batting down the buyer's shares by 12.7% on Monday to $20.29 and then another 7.5% on Tuesday to $18.77. The units were back up by almost 11% to $20.81 on Wednesday with the general market rising but are still off 10.5% for the week.
It's not unusual for the shares of a buyer to go down after an acquisition announcement, and this one is making Energy Transfer really big -- the fifth largest energy company in the world, with an enterprise value of $149 billion -- and more complex, with six different publicly traded businesses. "Value from Complication," is how Gimme Credit analyst Philip Adams titled his report on the deal on Tuesday.
The deal pushed the stock of a lot of master limited partnerships down with it, leaving folks in the analyst community scratching their heads.
"[It's] hard to rationalize the large-cap midstream space being worth around $70 billion less than a week ago," Tudor, Pickering & Holt Securities wrote in a note Wednesday.
The slide was part of a broader downturn of the entire energy infrastructure, or midstream, sector, which has been tarred with the same brush as the rest of the oil and gas industry, given lower oil prices. Most of these companies, structured as master limited partnerships for the tax benefits, have long-term, fee-based contracts, so they're less affected by the movement in oil and gas prices as their exploration and production and oil services counterparts.
But their shares have been beaten down around 30% on the longer-term risk that commodity prices don't support the big projects they want to build to help move oil and gas and their byproducts around, which would give them growth to continue doling out distributions.
There are also worries about "infrastructure oversupply" in some parts of the country, including the Northeast shale play, and increasing regulatory scrutiny -- with the Energy Transfer-Williams deal raising some eyebrows due to the buyer's plans to offer bundled services from wellhead to ultimate end customer -- "which we think may attract antitrust scrutiny," Gimme Credit's Adams said. Throw in environmental pushback that delays projects (note the Keystone XL pipeline), and it makes for a sobering outlook.
Still, some observers see a buying opportunity among these names, especially for investors who want yield in what's still a low-interest-rate world. "The correction was way too much and overdone," Yves Siegel, a portfolio manager of the Neuberger Berman MLP Income Fund (NML - Get Report) , said on the sidelines of Platts' pipeline development and expansion conference in Houston this week. "It's created investment opportunities."
Added Credit Suisse analyst John Edwards: "It [the sector] was probably overbought. Now it's probably oversold."
Siegel said that investors should stick with the more stable big boys of the bunch: pipeline and storage provider Energy Transfer, oil and natural gas transporter and processor Enterprise Products Partners (EPD - Get Report) and transportation, storage and marketing services provider Plains All American Pipeline (PAA - Get Report) . They all have high yields: Energy Transfer at 5.2%, Enterprise at 6.5% and Plains at almost 10%.
Other good names include crude oil and refined petroleum transportation, storage and distribution provider Magellan Midstream Partners (MMP - Get Report) and oil transportation and storage provider Sunoco Logistics Partners (SXL , one source at the conference said, noting their yields (5.17% for Magellan and 5.4% for Sunoco).
Tudor, Pickering & Holt likes Energy Transfer and Williams Partners (WPZ , as they both exceed 11% discounted cash flow yield on a 2017 basis with incremental cash flow from contracted growth projects, more than offsetting declines in their legacy asset bases.
In late August, JPMorgan analyst Jeremy Tonet recommended Spectra Energy Partners (SEP , Macquarie Infrastructure (MIC - Get Report) and Kinder Morgan (KMI - Get Report) -- Spectra for its "defensive asset base" that yields 5.3% with expected 8%-plus distribution growth through 2017, Macquarie for its "sustainable long-term value creation through conservatively widening the payout ratio," and Kinder Morgan for its scale, diversification and impressive record of growth through market cycles.
Observers are also expecting midstream entities to continue to combine in their quest for scale and growth.
"Equity markets are challenged, and the debt markets are becoming more so, and that's going to drive consolidation in the sector," Robert W. Baird banker Frank Murphy said at the Platts conference.
Kinder Morgan is moving ahead despite the turmoil. This week the company -- which opted out of the MLP structure last year to improve its cash flow and lower its cost of capital -- announced that it's executed agreements with producers, local distribution companies and an end-user for 627,000 dekatherms per day on a new long-haul pipeline out of the Marcellus.
Indeed, Seaport Global Securities analyst Sunil Sibal wrote in a report Thursday that West Texas' Permian Basin, the Bakken and the Western Canadian Sedimentary Basin are short of pipeline capacity and relying on more risky rail to move production out and to market. He also said that development of natural gas reserves in the Utica would support infrastructure development, which would benefit EQT Midstream Partners (EQM - Get Report) , which is developing the Mountain Valley pipeline, and Spectra, which is developing the Nexus pipeline project with DTE Energy (DTE - Get Report) .
Pipeline exports to Mexico could also be a big driver of U.S. production growth, with one analyst at the Platts conference saying that the Mexican market could grow from 8 billion cubic feet per day currently to 16 billion by 2020. It could be a new market with new growth opportunities for these much maligned midstream names.