A wave of mergers and acquisitions (M&A) activity has washed over the oil patch in the last year. Big oil behemoth ExxonMobil kicked things off with its $60 billion deal for Pioneer Natural Resources. Several rivals followed its lead, including Chevron, which is trying to buy Hess in a nearly $60 billion transaction.

The oil industry’s M&A wave has spilled over into the pipeline sector. Several midstream companies have made acquisitions, while the rumor mill suggests others are on the prowl. These deals will give pipeline companies more fuel to grow their cash flow and high-yielding dividends.

Let’s make a deal

Energy Transfer (NYSE: ET) prides itself on being a consolidator in the midstream sector. The master limited partnership (MLP) has made several acquisitions over the years. However, it has quickened its pace in the past year. The company made two deals last year (buying Lotus Midstream for $1.5 billion last May and closing its $7.1 billion merger with fellow MLP Crestwood Equity Partners in November).

The MLP has continued to make deals this year, buying WTG Midstream for $3.1 billion in July. Meanwhile, its affiliated MLP Sunoco LP acquired NuStar Energy for $7.3 billion. It subsequently formed a strategic joint venture to combine its crude oil and produced water-gathering assets in the Permian Basin (which it acquired in the NuStar deal) with Energy Transfer’s assets in the region.

These transactions share two common themes. They are strong strategic fits that enhance Energy Transfer’s existing assets. The deals were also accretive to its cash flow per share and had a neutral impact on its balance sheet. Because of that, they enhance the MLP’s plan to grow its 8%-yielding distribution by 3%-5% annually.

Oneok (NYSE: OKE) has been just as active. The pipeline company closed its transformational $18.8 billion acquisition of MLP Magellan Midstream Partners last year. That deal enhanced its scale and diversification while being highly accretive (free cash flow per share accretion will average more than 20% through 2027). Oneok followed that deal with $5.9 billion of acquisitions last month.

It’s buying Medallion Midstream and a 43% interest in EnLink Midstream from the same private equity firm. After closing that deal, Oneok plans to buy the remaining interest in EnLink from outside shareholders. Those deals will be immediately accretive to its cash flow and capital return program, which includes increasing its more than 4%-yielding dividend by 3%-4% per year.

Enterprise Products Partners (NYSE: EPD) has also been fairly active this year. It recently agreed to buy Pinon Midstream in a $950 million deal. In addition, it bought $400 million of joint venture partner interests from fellow MLP Western Midstream Partners (NYSE: WES). Those deals will give Enterprise Products Partners more fuel to increase its more than 7%-yielding distribution, something it has done for 26 straight years.

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More deals could be coming down the pipeline

The midstream sector’s consolidation wave is showing no signs of stopping. According to a Bloomberg report, natural gas pipeline giant Williams had some interest in buying midstream company Targa Resources. There’s some disagreement about the extent of the interest. Targa reportedly said it rejected the offer because it undervalued the company. Meanwhile, Reuters reported that Williams had never made an offer.

Either way, the rumors suggest that midstream companies are still searching for deals. Williams and Targa Resources have both been targets in the past. Energy Transfer had agreed to buy Williams in 2015, but that deal fell apart, which led Enterprise Products Partners to approach Williams with a deal the following year. Before that, Energy Transfer was interested in buying Targa.

Meanwhile, Western Midstream Partners’ largest investor, oil giant Occidental Petroleum, explored selling its stake in the MLP earlier this year. Occidental is selling non-core assets to repay debt following its $12 billion acquisition of CrownRock. While it did recently trim its interest in Western Midstream to raise some cash for debt reduction, it could eventually sell its entire remaining stake to another midstream company or a private equity fund. The buyer could then offer to acquire the rest of the company from outside shareholders, much like Oneok’s planned two-phased acquisition of EnLink.

In addition to deals between publicly traded midstream players, private equity companies have been cashing in on the M&A boom by selling their midstream holdings. Lotus, WTG, Pinon, and Medallion were all smaller midstream companies owned by private equity. Other financial investors will likely look to exit their positions while the window for deals is still wide open.

Adding more fuel to pay dividends

Pipeline companies prefer to grow organically by expanding their midstream infrastructure operations through expansion projects. However, many are turning to M&A to enhance their growth profiles. These accretive deals are increasing their cash flow, which will bolster their ability to increase their high-yielding dividends in the future. Because of that, income-focused investors could earn higher returns from the sector in the future as companies close additional accretive deals. That makes it a great place to collect a growing stream of passive income these days.

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Matt DiLallo has positions in Chevron, Energy Transfer, and Enterprise Products Partners. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners, Occidental Petroleum, and Oneok. The Motley Fool has a disclosure policy.

These High-Yield Dividend Stocks Are Turning to Acquisitions to Supercharge Their Growth Engines was originally published by The Motley Fool