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Apache Partners With Kayne Anderson for $3.5B Midstream Firm

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Apache's (APA) deal to spin off its Permian pipeline holdings into a new publicly traded company is likely to close by the end of the year.

Apache Corporation APA recently entered into a partnership deal with Kayne Anderson Acquisition Corporation for the creation of a pure-play Permian Basin midstream firm in Texas.

Deal Highlights

Apache will own 71% stake, expandable to 74% subject to performance earn-outs, in the new entity named Altus Midstream Company. The Houston-based publicly-traded new entity is likely to have a market capitalization of $3.5 billion, based on the assumed sale of 354.4 million shares at $10 per share.

Per the agreement, upstream player Apache will be contributing its midstream assets at Alpine High Play to Altus, while California-based Kayne Anderson Acquisition will spend $952 million in cash. Out of the $952 million, $380 million will be raised in the new entity’s IPO, while $572 million will be raised in a private placement of Class A shares.  

Subject to satisfactory closing conditions and approval by the shareholders of Kayne Anderson, the transaction is slated to close in the fourth quarter of 2018. Upon the culmination of the deal, Kayne Anderson will be renamed Altus Midstream, whose shares will be traded on NASDAQ.

Altus Midstream will be structured as c-corp, anchored with Apache’s Alpine High assets. Upon formation, the new firm will be devoid of any debt and own more than $900 million of cash in hand, to be utilized for the funding of growing midstream investments. Brian Freed, one of the top executives of Apache, will serve as the CEO of Altus Midstream.  

Altus Midstream will own natural gas facilities with a processing capacity of at least 380 million cubic feet per day, along with 178 miles of gathering and processed gas pipelines with connections to multiple markets. The new entity will operate Apache’s oil and gas pipelines in Alpine High and also have options for equity participation in five oil, gas and NGL pipeline projects, namely Gulf Coast Express, Salt Creek NGL Line, EPIC Crude, Shin Oak and Permian Highway.

Apache’s Midstream Efforts Bode Well

The deal holds much significance for Apache, as Alpine High, in the Permian Basin, has been the most important discovery of the company in the recent times. Estimated to hold massive oil/natural gas reserves, Alpine High is viewed as a game changer that is expected to generate top-tier returns for the company. In fact, it delivered better-than expected results in the last reported quarter on the back of high Permian volumes. The overall natural gas volumes are likely to exceed 1 billion cubic feet (Bcf) per day, churning out roughly 100,000 barrels NGLs on a daily basis by the end of the decade.

Since the discovery of Alpine High, Apache has been spending heavily in the play and a midstream infrastructure development is very crucial for the company to remain on the growth trajectory in the region. In May 2018, the company had inked a deal to enrich Alpine high midstream prowess, under which the firm will build a NGL header system with a takeaway capacity of 445,000 barrels per day, for catering to the growing production in the Delaware sub-basin of the Permian play. Apache currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The latest partnership deal will help to transfer some of the financial commitments toward the infrastructural development of its co-partner in this joint venture, leading to meaningful savings.

Permian Play: The Hotspot for Oil Explorers

Even during oil slump, the Permian Basin continued to turn out as a moneymaker for many of the oil producers owing to its low cost-high margin operational structure. The region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters make year-round work possible.

Last year, there had been a flurry of oil deals in the region owing to its attractive economics. Supermajors like Exxon Mobil Corporation XOM and Chevron Corporation CVX have been pouring in billions of dollars into the lucrative shale play. Other companies including Noble Energy Inc, Parsley Energy Inc., Marathon Oil Corporation had inked strategic deals in 2017 to expand their Permian foothold.

Oasis Petroleum Inc. also dived into Permian with $946 million acreage buyout in December 2017. In March 2018, Concho Resources Inc. inked a mega $9.5-billion deal to acquire RSP Permian. Just a day back, Occidental Petroleum Corporation OXY, in a bid to sharpen its focus on the prolific Permian, inked a $2.6-billion deal to vend its oil export terminal near Corpus Christi and a West Texas pipeline network.

Further, with crude prices finally rebounding to hover close to $70 per barrel since a couple of months, more and more oil producers are likely to enhance or capitalize their Permian portfolio, spurring “Permania” that has engulfed the U.S. oil industry.

Oil production in the region has been recording significant growth, with the current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise another 2 million Bpd by 2025.

Lack of Takeaway Capacity Spurs Permian Pipeline Race

While production in the Permian is soaring, takeaway capacity is not increasing in proportion. Due to pipeline capacity constraints, various producers have to sell their products at a discounted rate. The soaring constraints have thus triggered a race among various upstream and midstream companies to build, expand or invest in pipelines for ensuring smooth flow of Permian crude to Gulf Coast terminals. Some recent efforts undertaken by Magellan Midstream, ExxonMobil, among others, are outlined below.

EPIC Midstream Holdings LLC has formed strategic partnerships with Apache and Noble Energy Inc. for a 730-mile crude oil pipeline running from Permian to Corpus Christi. The pipeline, with a capacity of 590,000 barrels of oil per day, is expected to come online in the second half of 2019. ExxonMobil is also likely to invest around $2 billion in transportation infrastructural expansion in Permian to smoothly move its output to Gulf Coast.

Plains All American Pipeline LP is also moving ahead with its 585,000 bpd Cactus II pipeline, which will aid in ferrying oil from crowded Permian to Gulf Coast. The pipeline is slated to become operational next year. Enterprise Product Partners LP plans to expand more than 20% capacity of its Midland-to-Sealy oil pipeline, to help transport more crude from Permian. Magellan Midstream also intends to build a new pipeline, with a capacity of at least 350,000 bpd, to aid in the transportation of oil from Permian.

These efforts are much likely to ease the pipeline congestion problems in Permian, but whether in proportion to the surging production volumes or not, is a wait and watch story.

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