Enterprise Products to buy Navitas Midstream for $3.25 billion

Enterprise Products Partners agreed Jan. 10 to buy Navitas Midstream for $3.25 billion to acquire a major presence in the Midland Basin for natural gas and NGL gathering and processing.

The all-cash deal gives Enterprise a big footprint within the Permian's Midland Basin in West Texas, where Enterprise mostly only has long-haul pipelines leading to the Houston area.

"The Delaware and Midland basins are the two most attractive regions in the US in terms of crude oil, natural gas and NGL reserves with each having up to nine geologic horizons," Enterprise CEO Jim Teague said. "We do not have a natural gas or NGL presence in the Midland Basin other than downstream pipelines. This acquisition will give us an entry point into the basin."

Navitas controls nearly 1,750 miles of natural gas gathering pipelines, and more than 1 Bcf/d of cryogenic natural gas processing capacity with the completion of its new Leiker plant, which is expected to come online by the end of the first quarter. In 2020, Navitas completed the Howard County Express pipeline, serving eastern Martin and Howard Counties.

Navitas plans to grow to more than 1.3 Bcf/d of gas processing capacity in Midland by mid-2023, according to Enterprise.

Navitas is privately owned and financially backed by the private equity firm Warburg Pincus.

Enterprise said the deal will give it a stronger "entry point into the Midland Basin, one of the most economic and prolific crude oil regions in the US."

Enterprise noted that the basin includes about 20% of active onshore drilling rigs in the US. The system is anchored by long-term contracts and acreage dedications with a diverse group of more than 40 independent and publicly owned producers.

Enterprise said the Navitas footprint includes up to 10,000 drilling locations -- more than 15 years of drilling inventory based on current rig counts.

The deal is expected to close by the end of the first quarter.

"We are excited to contribute our unique Midland Basin system to Enterprise, one of the premier midstream operators," Navitas CEO Bruce Northcutt said in a statement. "I am proud of what the Navitas team accomplished over the past seven years, and would also like to thank Warburg Pincus for their close partnership along the way."

Colton Bean, an energy analyst with Tudor, Pickering, Holt & Co., said the Navitas assets will pair nicely with Enterprise's existing gas processing capacity of about 1.6 Bcf/d in the Permian's Delaware Basin.

However, Bean questioned whether the expanded wellhead exposure will be justified for Enterprise if the deal results in minimal incremental downstream volumes for Enterprise's pipelines, fractionation and export businesses.

Navitas was founded in 2014 and was initially built up through acquisitions from DCP Midstream. The Warburg Pincus team previously pursued a sale of Navitas in 2018, but decided to hold off at the time.

Bullish outlook

Much of the recent growth at Navitas is supported by the ramp-up in drilling by private producer Endeavor Energy Resources, the top private operator in the Midland Basin, said Zack Van Everen, a senior analyst at East Daley Capital Advisors.

"The privates have the freedom to spend capital more readily," Van Everen said of the recent surge in activity with higher oil and gas prices.

Currently, natural gas gathering and processing is a key growth need for the Permian with capacity limited, Van Everen said. Oil production growth in the Permian also is dependent on more gas processing construction because there is added pressure on producers to eliminate flaring from associated gas production from oil wells, he said.

Led by the Permian, US shale oil production is expected to return to pre-pandemic volumes of 8.5 million b/d by the end of 2022, according to S&P Global Platts Analytics, and gas production and demand will remain strong as well. US natural gas production is still trying to catch up to demand.

"Sustained Henry Hub price levels in excess of $3/MMBtu are likely to maintain gas-to-coal switching and incentivize additional supply, especially since strong global gas prices will keep US LNG exports at or near maximum levels," Platts Analytics said in a recent report.

Longer term, the outlook for gas is healthy even if the US eventually adopts a federal clean electricity standard, Platts Analytics said. "Despite the assumption that a CES will force North American gas demand to peak sooner rather than later, an expansion of gas supply and midstream infrastructure will still be necessary to meet demand, including growth in exports."