The Daley Note: April 4, 2023
Energy Transfer (ET) plans to acquire Lotus Midstream for $1.45B ($900MM cash), raising the midstream giant’s profile in crude oil transport from the Permian Basin. East Daley Analytics estimates ET paid a 7.5x EV/EBITDA multiple based on our forecast for the Lotus assets in 2023.
The Lotus Midstream purchase was announced last Monday (March 27). The deal comes a little over a month after ET’s 4Q22 earnings call, when management mentioned it will continue to look at acquisitions and target leverage on the lower end of the 4.0-4.5x range to keep some powder dry.
Lotus will give ET an extensive Permian crude gathering system, the long-haul Centurion Pipeline from Permian to Cushing, 2 MMbbl of Permian crude storage capacity, and a 5% stake in the massive 1.05 MMb/d Wink-to-Webster (W2W) pipeline to the Gulf Coast.
Using East Daley’s market analytic tools, we can derive an initial estimate and forecast of Lotus Midstream’s EBITDA to understand the deal metrics.
From East Daley’s Energy Data Studio, we can pull financials and volumes for the Centurion LP assets from Federal Energy Regulatory Commission (FERC) filings, and forecast future pipeline volumes using our Crude Hub Model. From our Plains All American (PAA) Financial Blueprint, we also can estimate rates and utilization for the Lotus storage assets and W2W.
Taken together, we estimate Lotus’ earnings to be ~$170MM in 2022. Earnings could grow to ~$195MM this year due to Permian supply growth, increased Oklahoma volumes from ET’s Cushing-to-Nederland project, and a ramp-up in minimum volume commitments (MVCs) on W2W. That equates to a 7.5x EV/EBITDA multiple for 2023 (see figure).
Our ET Financial Blueprint shows the acquisition will have a negligible impact on ET’s leverage and is accretive to DCF/unit, in line with expectations laid out in the company’s 4Q22 earnings. Leverage remains near the 4.0x target, preserving ET’s dry powder for additional growth opportunities.
ET only includes projects with a final investment decision (FID) in its $1.6-1.8B growth capex guidance, but it has a slew of potential projects that could be added to that number, including the Warrior pipeline, Lake Charles LNG, a petrochemical facility, and other acquisitions similar to the Lotus deal.
We see the strategic rationale for ET’s purchase. The company already had a joint tariff with Centurion through its Cushing-to-Nederland project, and now can directly ship crude from the Rockies and DJ Basin to Nederland, TX. In addition, the Permian crude gathering assets could help support volumes on ET’s Permian crude egress pipelines.— Ajay Bakshani, CFA Tickers: ET, PAA.
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Review the Year Ahead in Dirty Little Secrets
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