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Targa finds 'needle in the haystack' in up to $1.5B Permian midstream buy

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Targa finds 'needle in the haystack' in up to $1.5B Permian midstream buy

Targa Resources Corp. found a "needle in the haystack," its CEO said, in a deal for up to $1.5 billion its affiliate struck to buy Outrigger Delaware Operating LLC, a midstream company active in two of the fastest-growing unconventional plays in the world.

The assets Targa Resources Partners LP plans to acquire are spread across six counties in Texas and are in the Permian's prolific Delaware and Midland basins.

"The Delaware Basin assets are underpinned by high-quality producer dedications of more than 145,000 acres under long-term, largely fee-based contracts, with a weighted average contract life of 14 years. Outrigger Delaware assets include 70 million cubic feet per day of processing capacity," Targa said. "The Midland Basin assets are underpinned by high-quality producer dedications of more than 105,000 acres under long-term, largely fee-based contracts, with a weighted average contract life of 13 years. Outrigger Midland currently has 10 million cubic feet per day of processing capacity, and Targa expects to connect the Outrigger Midland assets to Targa's WestTX system in Martin County."

As part of the deal, Targa will pay Outrigger $565 million in cash at closing and then will make two additional payments in 2018 and 2019 that could bring the total sum to $1.5 billion.

"These are assets underpinned by dedicated acreage in some of the most geologically attractive areas of the Permian Basin, where producer results in and around these assets continue to get better and better, and where producers have a deep inventory of drilling locations with some of the best well economics in the world," Targa CEO Joe Bob Perkins said on a conference call Jan. 23. "We believe the Outrigger Permian crude assets in both the Delaware and Midland basins provide us with an excellent platform to add a new Permian business line with significant growth potential."

Perkins also said the deal will increase Targa's gross processing capacity in the Permian Basin to approximately 2 Bcf/d by the end of 2017.

"This is a needle in the haystack deal, a perfect fit at the right price," he said.

Patrick McDonnie, executive vice president of southern field gathering and processing, said the location of the Outrigger assets in the Midland and Delaware basins not only made them a bolt-on acquisition for Targa but also are nearly perfectly positioned as unconventional drilling booms. "Over 50% of the rigs added in North America since the rig count hit its trough in May of 2016 have been added in the Permian, and the outlook feels like it is only getting stronger. And based on our estimates, approximately 65% of the rigs currently active in the Permian are within a 10-mile radius of the Targa assets," he said.