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Concho (CXO) Monetizes Permian Midstream Assets: Here's Why

Zacks Equity Research
ONE Gas (OGS) reports strong Q1 results, courtesy of new rates, colder-than-normal weather and customer growth.

Concho Resources Inc. CXO announced its decision to divest stake in Oryx Midstream to Stonepeak Infrastructure Partners.

The Deal

The transaction entails the sale of a 23.75% stake of Concho in the Oryx I gathering system that is owned by Oryx Midstream, a privately-held energy player possessing key midstream assets like gathering and transportation system of crude in the prolific Permian.

Concho is likely to get roughly $300 million upon closing of the agreement.

Motive Behind the Accord

In the Permian, there has been a dearth of transportation capacity to carry mounting oil volumes to the key markets. Hence, to solve the pipeline bottleneck problem in the basin and transport growing U.S. oil production volumes, energy players are investing billions for new and existing midstream infrastructures. 

This has created an opportunity for Permian explorers and producers to sell their midstream assets to either midstream energy firms or private equity funds at a substantial premium to the originally invested capital. Concho, an upstream energy company with a significant presence in the Permian, is simply following the suit.

In view of the recent deal, Concho is expecting to bag $300 million, which is in addition to $157 million it received in February 2018 from recapitalization of Oryx. Hence, the current total consideration of $457 million is representing 10 times increment to the company’s initial investment of $45 million in Oryx I in December 2015.  

In addition to Concho, WPX Energy Inc. WPX also announced its decision to sale stakes in Oryx Midstream to Stonepeak Infrastructure Partners, a private equity firm. Notably, WPX Energy has 25% equity ownership in the Oryx II pipeline. The divestment deal will likely fetch roughly $350 million to the Permian-focused upstream firm.

Investors should know that the decisions of Concho & WPX Energy are part of the broader agreement, in accordance to which, the private equity firm is acquiring Oryx Midstream for a cash consideration of $3.6 billion. Both Concho & WPX Energy carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Energy Players Following the Trend

Amid the pipeline pinch in Permian, other Zacks #3 Ranked explorers like Apache Corporation APA and Occidental Petroleum Corporation OXY also reportedly cashed in on their midstream assets last year for premium prices.

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