Enterprise Products (EPD) has agreed to purchase sour gas gathering and treating infrastructure from Pinon Midstream for $950MM in cash. The deal spotlights “off-spec” sour gas increasingly produced as operators explore shallower areas in the eastern Delaware Basin.
Located in Lea County, NM, the Pinon assets include 50 miles of gathering lines, two acid gas injection wells with 20 MMcf/d of capacity, a sour gas treating facility with 270 MMcf/d of capacity, plus compressors. An expansion is planned to increase treating capacity to 450 MMcf/d in 2H25. The assets are located in a part of the Delaware known for higher hydrogen sulfide (H2S) and carbon dioxide (CO2) content, particularly in shallower reservoir targets.
As development increases in the eastern Delaware, East Daley sees more need for sour gas treating and injection facilities due to the high concentrations of H2S and CO2 produced in shallower reservoirs. For example, Delaware-focused Kinetik (KNTK) has outfitted all its processing facilities with front-end amine treaters so the company can expand into New Mexico to process off-spec gas. 
There is no gas processing available on the Pinon system, so treated ‘sweet gas’ is offloaded to third parties for processing. Based on our review of gathering systems in the area, the three Pinon third-party offload points terminate at or near existing EPD, Targa Resources (TRGP) and Salt Creek Midstream gathering lines (see map).
The Pinon assets will add $0.03/share of distributable cash flow in 2025, according to EPD guidance, or ~$65MM. Assuming the expansion fully ramps, East Daley estimates the Pinon assets will generate ~$99.5MM in EBITDA in 2026 in the EPD Financial Blueprint, representing a 9.6x EBITDA multiple on the $950MM purchase price.
EPD's guidance does not include commercial synergies. If the company can capture the sweet gas volumes currently processed by TRGP and Salt Creek, the Pinon assets would provide additional upside and lower the multiple.
Our 9.6x estimated multiple screens high for these types of assets. But if Enterprise can redirect all of Pinon’s volumes to its Delaware system and incentivize additional drilling (by expanding treating and injection capacity), the deal could prove a highly strategic move.
Producers in the past have shied away from drilling in the eastern Delaware due to gas quality issues, despite the prolific crude oil reservoir. We expect these expansions for gas treating will accelerate development, in turn providing more downstream volumes to support Enterprise’s integrated value chain in the Permian. – James Taylor and Ajay Bakshani, CFA Tickers: EPD, KNTK, TRGP.
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