Enterprise Products Partners: Pinon Midstream Deal Looks Like Long-Term Winner

Enterprise Products Partners has agreed to acquire Pinon Midstream, the owner of a significant sour gas treating system in the Delaware Basin for $950 million in cash. While the financial accretion is minimal in the near term ($0.03 per unit of distributable cash flow is expected by management in 2025), we see this as a strategic winner over the long run, as it addresses an important and growing need for producers in the Delaware basin. This portion of the Delaware Basin has about 7,500 well locations, where drilling activity has been restricted given the lack of sour gas and acid treating capacity as well as the lengthy permitting process for acid injection wells (up to two years). Enterprise believes this transaction accelerates its efforts in the area by three to four years. This sour gas treating topic has been a frequent point raised on recent industry conference calls, and solving it has proved challenging, so this transaction positions Enterprise as an early and significant leader. Given the modest financial impact of the transaction, we expect to maintain our $31 fair value estimate and wide moat rating. The system is made up of gas gathering and delivery pipelines, 270 million cubic feet per day (MMcf/d) of hydrogen sulfide and carbon dioxide treating facilities (expandable to 460 MMcf/d), and two high-capacity acid injection wells with a third well under evaluation. All three injection wells would have capacity of about 750 MMcf/d. Carbon dioxide sequestration has been approved by the US Environmental Protection Agency at the two wells, which also qualifies for 45Q tax credits. Contracts tend to be long term and fee-based with minimum volume commitments and involve acreage dedications.