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Energy Giants Are Stalking This Prey in Hopes of Bagging a Speedy New Growth Platform

By Matthew DiLallo - Oct 3, 2017 at 9:38AM

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This private equity-backed pipeline company holds a prime position in a red-hot oil play, which is causing several energy giants to want to bring it into the fold.

According to a report by Bloomberg, private equity-backed Oryx Midstream Services is weighing its options, including a potential sale or initial public offering. That report noted that several energy giants had expressed interest in buying Oryx, including master limited partnerships Enterprise Products Partners (EPD 1.07%) and Magellan Midstream Partners (MMP 0.88%)and refining giant Valero Energy (VLO 1.60%). Fueling that interest is Oryx's growing footprint in the Permian Basin, where production is expanding at a rapid rate as producers tap into its treasure trove of oil.

Zeroing in on the target

Oryx Midstream Services formed in early 2014 when a group of investors committed $300 million in equity to pursue midstream opportunities in the Permian Basin. It has since developed the Oryx Trans Permian pipeline system (OTP), which currently has the capacity to transport 160,000 barrels of oil per day via 260 miles of gathering lines and 114 miles of transmission pipeline. Furthermore, it has three storage and pumping terminals with 390,000 barrels of capacity.

A team of welders working on a pipeline.

Image source: Getty Images.

One noteworthy aspect of this system is that it interconnects with Magellan Midstream Partners' Longhorn Pipeline and Enterprise Products Partners' Midland Terminal. Those strategic connection points are why both MLPs have expressed interest in buying the company.

Another reason Oryx Midstream is drawing buyout interest is due to its visible growth prospects. For example, the company can expand OTP's capacity up to 200,000 barrels per day in the near term. In addition, the company recently announced that it would build a new regional crude oil transport pipeline. This second project involves constructing a 220-mile pipeline that would move up to 400,000 barrels of oil per day to an oil storage hub in Midland, Texas, when it enters service at the end of next year.

The company is also considering building a long-haul transportation system to the Gulf Coast that would better meet the future needs of its customers. That direction is worth noting because Enterprise is currently building a 450,000-barrel-a-day pipeline from Midland to Sealy, Texas, where it can connect to the Gulf Coast while Magellan's Longhorn Pipeline connects to the refining complexes in the Houston area. Meanwhile, Valero operates several refineries along the Texas coast and would benefit if another pipeline headed in its direction.

A person in a hard hat standing near a stack of pipelines.

Image source: Getty Images.

Premium assets with a price tag to match

While there's a clear strategic fit with all three of those potential buyers, a future sale of Oryx would come down to price. According to the Bloomberg, the sellers are seeking a valuation as high as $3 billion. What's worth noting about that price is that it's a fraction of the $640 million of equity that its private equity backers have injected into the company to support the first two project phases. Even after assuming 50% leverage, the asking price represents double the likely cost to build its compelling Permian footprint.

However, that's not surprising considering the valuations that midstream assets in the region are selling for these days. Just this week, for example. Laredo Petroleum (LPI -0.07%) announced the sale of its stake in Medallion Midstream Services, which it co-owns with a private equity fund. Laredo Petroleum made its initial investment in the system in 2013 to help support its growth. However, thanks to the red-hot market for Permian infrastructure, it was able to cash in and will recognize proceeds of more than three times its invested capital, generating an internal rate of return of 65%. Laredo will receive such a hefty payday from the sale that it will cut debt by more than half.

That's just one of several high-priced Permian midstream deals in the past year. Because of that hot market, fiscally conservative MLPs like Magellan Midstream Partners and Enterprise Products Partners need to weigh the obvious strategic fit and visible growth potential of Oryx with the asking price. If it's too high, these companies will likely pass on the deal rather than potentially handcuffing their financial flexibility by overpaying

If the price is right, this would be an excellent addition

MLPs Enterprise Products Partners and Magellan Midstream Partners would love to get their hands on Oryx Midstream because it holds a rapidly expanding position in the Permian that links fast-growing producers with their existing network. That expandable footprint would give either company more fuel to continue to grow its distributions to investors in the future. That is, of course, if they can get it for a fair price, which might require some creativity such as contingent payment or a joint bid to help keep the premium to a reasonable level.

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Stocks Mentioned

Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$24.63 (1.07%) $0.26
Valero Energy Corporation Stock Quote
Valero Energy Corporation
$107.98 (1.60%) $1.70
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$48.18 (0.88%) $0.42
Laredo Petroleum, Inc. Stock Quote
Laredo Petroleum, Inc.
$68.89 (-0.07%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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