The Daley Note: November 03, 2022
Plains All American (PAA) and Enbridge (ENB) have jointly acquired Western Midstream’s (WES) 15% interest in the Cactus II crude oil pipeline for $265 million. While Cactus II has a thorny history, the transaction positions PAA and ENB to ride a recovery in Permian Basin crude oil production, according to our Crude Hub Model.
The companies announced the transaction prior to Plains’ 3Q22 earnings call. Cactus II transports crude oil from the Permian to refiners and terminals near Corpus Christi, including ENB’s Ingleside Energy Center. The deal values the pipeline at $1.77 billion, implying an EBITDA multiple of 14x based on the trailing 12 months of financials filed with the Federal Energy Regulatory Commission. PAA now controls 70% of Cactus II, and ENB holds the remaining 30%.
Cactus II has had a rough go since it began operations in late 2019. Shipments and cash flows were initially strong in 4Q19 and 1Q20, but pandemic-related supply issues, including deficiency shipments from its anchor shipper, Trafigura, have plagued the pipeline. The resulting glut of Permian pipeline egress forced Cactus II to cut its walk-up tariff and to heavily discount its incentive rates, which drove down the pipeline’s average rate from $1.12/bbl in 1Q20 to $0.75/bbl in 2Q22.
Despite these difficulties, we have a positive outlook on Cactus II and expect flows will continue to improve. Data from East Daley’s Crude Hub Model projects Cactus II will transport ~547 Mb/d in 4Q22 and more than 635 Mb/d by YE2025. Additionally, we expect Cactus II to see its average tariff rate improve due to tightening Gulf Coast egress capacity, widening basis differentials, annual tariff rate increases, and increasing walk-up volumes. If we value the transaction based on 2023 EBTIDA projections, we calculate a 10.7x multiple, which continues to improve to a sub-8x multiple as basin takeaway tightens.
While the price may seem steep, we see long-term value in the acquisition for PAA and ENB. The transaction strengthens their Permian positioning and secures additional supply for ENB’s Ingleside Energy Center (previously owned by Moda Midstream). – AJ O’Donnell Tickers: ENB, PAA, WES.
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Join East Daley for a Spotlight Happy Hour
Join East Daley in Houston at our Spotlight Happy Hour on November 9 as we discuss the new Targa Resources Spotlight Report and meet the teams from RBN Energy and East Daley. The event will follow the Targa Resources Spotlight Report, released on Nov. 2, and the Spotlight Live Session webinar being held on Nov. 7 at 10:30 AM CT online. You will have the opportunity to ask us questions about the Spotlight Report and Live Session, plus network with some of the energy industry’s best and brightest. Learn more on East Daley's Events page.
3Q22 Earnings Previews Now Available
East Daley has published a complete group of 3Q22 Earnings Previews and Blueprint Financial Models for midstream companies within our coverage. Quarterly Earnings Previews and Blueprints are now available for Antero Midstream (AM), Crestwood Equity (CEQP), Enbridge (ENB), EnLink Midstream (ENLC), Enterprise Products (EPD), Energy Transfer (ET), Equitrans Midstream (ETRN), Kinder Morgan (KMI), Kinetik Holdings (KNTK), Magellan Midstream (MMP), MPLX (MPLX), ONEOK (OKE), Plains All American (PAA), Summit Midstream (SMLP), Targa Resources (TRGP), TC Pipelines (TRP), Western Midstream (WES) and Williams (WMB).
Our Earnings Previews include quarterly earnings forecasts compared to Street consensus, a detailed list of the top assets that will impact the quarter, analysis of near- and long-term risks to future earnings, along with forecasts for Adj. EBITDA by segments. Please log in to access these reports.
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