The Daley Note: September 12, 2023
Western Midstream (WES) has reached an agreement to acquire Meritage Midstream’s Powder River Basin assets for $885MM in cash. The deal for the Meritage assets significantly expands Western’s footprint in the northern Rockies basin.
WES announced the deal on August 5. Meritage’s Powder River assets include two natural gas processing plants with 380 MMcf/d of capacity, nearly 1,500 miles of low- and high-pressure gathering lines, and the Thunder Creek NGL Pipeline with 38 Mb/d of capacity. The purchase price represents a 5x-6x EBITDA multiple, according to Western.
The latest inlet data in East Daley’s Energy Data Studio shows Meritage’s 50 Buttes and Steamboat plants processed 244 MMcf/d in July ‘23, or 64% utilization. Plant inlet volumes on the Meritage system have grown 23% to date in 2023, averaging 219 MMcf/d vs 178 MMcf/d in 2022. EOG Resources (EOG) and Devon Energy (DVN) account for two-thirds of the volume on the Meritage system (see figure).
The companies expect to close the deal in 4Q23. Given uncertainty around the timing of the close, WES will not be adjusting its 2023 EBITDA guidance at this time.
The move by WES is a vote of confidence in the Powder River and will help diversify the company’s core operations in the Permian and Denver-Julesburg basins. WES already owns the smaller Hilight G&P system in the Powder River, comprised of 1,200 miles of gathering lines and 60 MMcf/d of processing capacity. The Hilight plant saw throughput of 43 MMcf/d in July ‘23, or 71% utilization, according to Energy Data Studio.
WES will have a combined 440 MMcf/d of gas processing in the Powder River Basin once the dust settles on the deal, with more spare capacity available to compete for business (see figures below). The Meritage assets come with upside as well; the Steamboat plant in Converse County, WY could be further expanded by 400 MMcf/d.
Increased natural gas volumes will provide a substantial lift to Western’s’ Powder River G&P segment. In our company Financial Blueprint, East Daley models 2024 Adj. EBITDA for the Powder River segment at ~$14MM. Assuming volumes on the Meritage system hold at 2023 levels, we model segment EBITDA would increase to $161MM in the WES Financial Blueprint.
The Thunder Creek pipeline collects NGLs from Meritage’s 50 Buttes and Steamboat I processing plants and delivers volume into ONEOK’s (OKE) Niobrara lateral and Elk Creek pipeline. Thunder Creek is regulated by the Federal Energy Regulatory Commission (FERC) and reported EBITDA of $9.5MM in 2022, according to regulatory filings. The NGL pipeline is on track to outpace those earnings this year, posting 1H23 EBITDA of $6.3MM, according to filings at FERC .
Together, East Daley estimates the Thunder Creek G&P and NGL assets would add ~$157MM in Adj. EBITDA in 2024, representing a 5.6x EBITDA multiple on the $885MM acquisition price. The Meritage assets include a CO2 treating plant that was not included in this analysis. – James Taylor Tickers: DVN, EOG, OKE, WES.
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