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27 Mar, 2023
By Bill Holland
Midstream operator Energy Transfer LP will expand its position in the prolific Permian Basin with the purchase of Lotus Midstream LLC for approximately $1.45 billion.
Lotus Midstream operates a Permian crude transportation system with more than 3,000 miles of pipeline stretching from southeastern New Mexico through the Permian and onward to the oil storage hub in Cushing, Okla., Energy Transfer said in a March 27 news release.
"This advances Energy Transfer's ability to control more crude oil barrels in the Permian and bring them into their supersystem," Mizuho Securities USA LLC midstream analyst Gabriel Moreen said in an interview. "This deal should work out pretty well for Energy Transfer. When they bought SemGroup a few years ago, they also acquired [SemGroup LLC's] critical storage position in Cushing. This kind of connects the map."
Energy Transfer said the acquisition enlarges its Permian footprint and will add gathered volumes of crude oil to its system while expanding its access to major US Southwest hubs such as Cushing, Midland, Colorado City, Wink and Crane. The system is anchored by large customers with long-term contracts, the company said. Lotus' Centurion Pipeline Co. LLC system provides gathering, in-basin transportation and long-haul transportation, Energy Transfer said. The deal would include a 5% equity interest in Marathon Petroleum Corp.'s Wink-to-Webster pipeline, a 650-mile crude oil and condensate line from the Permian Basin to the Gulf Coast.
After the deal closes, expected in the second quarter, Energy Transfer said it will start construction on a 30-mile pipeline to be completed in 2024 that will allow customers to ship from its Midland terminals to the Cushing Hub.
Energy Transfer said it will pay $900 million in cash and 44.5 million shares — worth $520.7 million based on March 24 closing prices — to an affiliate of Lotus' backer, private equity firm EnCap Flatrock Midstream LP. Energy Transfer said the Lotus assets will immediately add to its earnings.
Charles Johnston, a senior analyst at research firm CreditSights, did not expect the deal to change Energy Transfer's leverage ratios significantly. Johnston expected Energy Transfer to partially fund the cash portion of the deal out of its $5 billion credit revolver and to come back to the debt markets later this year.
"We have noted potential for Energy Transfer to explore further M&A activity, but said we would not expect to see the balance sheet burdened," Johnston told clients in a note after the deal was announced. "We have a slightly positive view on the deal based on the transaction being leverage neutral and expanding their Permian crude takeaway position with firm long-term contracts, as well as providing increased connectivity across their system."
Energy Transfer stock was up 1% to $11.81 per share on moderate volume in midday trading. The share performance of US independent shale oil drillers in the Permian Basin has been lackluster as operators are forced to spend just to maintain production at a time of lower prices for crude oil and natural gas.
Mizuho's Moreen said that while investors are looking for companies to spend their cash on buybacks and dividends, they will accept deals that immediately add income. "I think the market remains very open and receptive to [master limited partnerships] and midstream companies doing these kinds of deals," Moreen said. "I think you're going to see similar types of deals because the MLPs have the balance sheet capability to transact, and it seems to me like private equity is a reasonably motivated seller here."
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.