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Combination of EagleClaw and Altus to create midstream 'super system' in Delaware Basin: CEO

Highlights

Deal to close Q1 2022, forming publicly traded company

Would hold majority ownership of Permian Highway Pipeline

Blackstone could drop down 25% stake in Grand Prix NGL Pipeline

The reverse merger acquisition of Altus Midstream by EagleClaw Midstream in the Permian's still-booming Delaware Basin will create a "super system" in the region that is set to benefit from increasing drilling activity because of multiyear high natural gas and crude oil prices, EagleClaw CEO Jamie Welch, who will lead the combined company, said in an Oct. 22 conference call.

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The merged company, which would be heavily weighted toward natural gas gathering and processing in the West Texas Delaware, would be publicly traded under a yet-to-be-determined name and allows EagleClaw to continue consolidating the Delaware's midstream sector. Altus sponsor Apache Corp. can cut debt and further focus on the resumption of activities in the Permian's gassy Alpine High development that went dormant last year during the peak of the ongoing pandemic.

"It is a dream of a system," Welch said, pointing to the huge upside in growth coming out of the pandemic with front-month NYMEX WTI trading above $80/b. "We're at the bottom of the cycle. This is as bad as it gets from the worst pandemic since the Spanish flu."

Economic incentives

Now it is time to focus on maximizing free cash flow and growth without relying on new debt, he said. Welch argued the deal is a win-win for potential growth because there are economic incentives for new gas drilling, and the high oil prices will trigger more gas production.

"You are actually filling up these pipes with free gas -- with associated gas from oil drilling," Welch said. "This is more representative of demand pull than it is from supply push."

The deal creates the largest pure-play midstream company in the Permian, specifically focused in the Texas side of the Delaware. The merged company, which is expected to close in the first quarter of 2022, would have 60% of the company focused on gas gathering and processing. The rest of the business would be split with 28% dedicated to joint ventures on long-haul natural gas pipelines; 5% on NGL JV pipelines; 3% on crude gathering; 3% on water disposal; and 1% on long-haul crude pipelines through a 15% ownership stake in the new EPIC Crude Pipeline.

The new company would have a total enterprise value of about $9 billion, the companies said. Altus had a market capitalization value of about $1.4 billion at the end of Oct. 21.

The company would have a combined 53% majority stake in the Kinder Morgan-operated Permian Highway Pipeline. The business also will have a 16% interest in the Gulf Coast Express natural gas pipeline and a 33% stake in the Shin Oak NGL Pipeline. EagleClaw owner Blackstone also owns a 25% stake in Targa Resources' Grand Prix NGL Pipeline from the Permian that could be dropped down to the merged EagleClaw-Altus.

The total operations include 2 Bcf/d of natural gas processing capacity near the Permian's Waha hub, making the company the largest natural gas processor in the Delaware and the third-largest across the entire Permian.

Permian resurgence

With crude oil and natural gas prices both near multiyear highs, the Permian is leading the US' resurgence in production volumes. US crude and condensate production fell to 9.7 million b/d in May 2020 from an all-time high of nearly 13 million b/d in March 2020, S&P Global Platts Analytics data shows. Production has since climbed to roughly 11.3 million b/d.

The Permian has recovered to roughly its previous high of 4.8 million b/d, according to the US Energy Information Administration.

Altus has served as the natural gas midstream spinoff of Apache, which owns 79% of Altus. The deal helps Apache reduce its debt, diversify and potentially invest more in new drilling, specifically in the Alpine High, which has slowly seen activity ramp back up this year, analyst Jeoffrey Lambujon, of Tudor, Pickering, Holt & Co., said in a note.

Apache, which operates under the APA Corp. holding company, has a limited exception in the deal permitting it to sell up to 4 million shares until three months after the deal closes, provided that Apache invests the first $75 million of proceeds in its natural gas-heavy Alpine High development in the Permian over 18 months to help spur more activity.

EagleClaw was formed through private equity backing from Blackstone -- and is now also owned by I Squared Capital -- and is resuming its consolidation efforts after previously scooping up Caprock Midstream and Pinnacle Midstream in 2018.

"The transaction offers line-of-sight to monetization for existing sponsors (Blackstone, I Squared, and APA) while introducing a Permian pure play with significant scale as public float improves," analyst Colton Bean, also of Tudor, Pickering, Holt & Co., said in a note.

The merged company will be owned by Blackstone, 50%; I Squared Capital, more than 20%; APA, 20%; and public shares, more than 5%. Or, more specifically, nearly 75% for EagleClaw's parent, BCP Raptor Holdco, and more than 25% for Altus.

New Mexico production

With just modest growth, Welch said the business could better accommodate more production from the New Mexico side of the Delaware Basin. Already the combined company would cover 850,000 gathering-dedicated acres in the Texas Delaware.

Welch said he sees the upstream consolidation in the Permian as better benefiting EagleClaw-Altus with more financial backing and consistency. The company's services cover a lot of the acreage of major players EOG Resources and ConocoPhillips, which just bought Shell's Permian assets. The company also serves growing midsized players such as Callon Petroleum and Colgate Energy.