HOUSTON, March 21 (Reuters) -

U.S. energy pipeline and storage operators have spent two

years watching the consolidation of oil and gas producers, and

now they are gearing up for the merger wave to hit their sector,

executives, investors, and analysts said.

The midstream sector has a lot of specialized midsize firms

and only a handful of very large operators able to provide the

services across a wide geographic footprint. Mergers will result

in more suppliers able to provide processing, transport, storage

and export services, according to executives and dealmakers.

There were $12.5 billion of midstream deals announced

through mid-March, compared with $21.9 billion for all 2023,

according to researcher Enverus. If the current pace holds, this

year will be the biggest for midstream mergers and acquisitions

since 2019.

Scale "is definitely important," Williams Companies ( WMB )

Chief Operating Officer Michael Dunn told Reuters on the

sidelines of the CERAWeek by S&P Global conference. "Continuing

to expand is certainly one of our goals."

Due to the hurdles of getting new energy infrastructure

approved and built, it can make more sense to buy a company than

put steel in the ground yourself, Pierce Norton, CEO of Oneok ( OKE )

said in an interview at CERAWeek.

Oneok ( OKE ) bought Magellan Midstream last year, to expand its

natural-gas business into refined products and crude

transportation.

HOW DEALS WILL UNROLL

A consolidation wave in midstream would skip the initial

phase of private-company deals that enveloped shale companies

and jump straight to strategic combinations, said those working

on such deals.

"There are not too many private midstream businesses of

scale left, as many were sold in recent years, so further public

midstream consolidation is inevitable," said Pete Bowden, global

head of industrial, energy and infrastructure at Jefferies

Financial Group ( JEF ).

This year, Sunoco ( SUN ) agreed to acquire storage provider

NuStar Energy ( NS ) for $3.9 billion, and EQT Corp ( EQT )

announced it would buy its former spinoff Equitrans Midstream ( ETRN )

for $5.5 billion.

The EQT deal will "reduce our cost structure to a level

where we can withstand the negative stress case of prices like

the $2 (per million British thermal units) we see today," said

EQT CEO Toby Rice. That price is less than a third of the

average for 2022.

Other deals are percolating: Occidental Petroleum ( OXY ) is

weighing options for its controlling stake in Western Midstream

Partners ( WES ), Reuters reported last month. Summit Midstream

Partners ( SMLP ) last week said it was in the advanced stages

of a review of strategic alternatives.

Like the shale producer combinations, the coming wave of

midstream deals will not be salvage jobs of last decade. U.S.

midstream companies are in a position of strength having cut

debt and switched to fee-based business models less exposed to

commodity price swings.

Scott Wexler, head of North American midstream at Citigroup ( C/PN )

, said companies are trading below 3.5-times

debt-to-EBITDA, compared to more than 4-times prior to the

COVID-19 pandemic.

"It makes it easier to go out and do deals, in particular

when the rest of the universe has fixed themselves and so those

combinations don't put in peril your strategic objectives," he

added.

RESHAPING INDUSTRY

A similarity to shale combinations is midstream's need for

greater scale to cover more shale basins, to share the costs of

methane reduction and to deliver immediate shareholder returns.

"Some of the deals we've started to see are midsize public

companies where the management teams are realizing they

have carried the ball as far as they can on their own," said

Michael Casey, head of midstream and downstream at Wells Fargo ( WFC )

.

Greater scale will allow companies to earn more by

delivering more services.

"The more I can touch that molecule, the more margin I can

realize. People are looking at ways to further their

opportunities to do that," Casey explained.

As their existing contracts expire in coming years, the

newly enlarged oil and gas producers will look to pare suppliers

to cut their cost of business.

"As these (producers) have been getting bigger, one would

expect this to be followed by a renewed focus on the part of the

midstreamers to follow suit," said Jefferies' Bowden.