Phillips 66 (PSX) announced May 20 that it reached an agreement to buy independent company Pinnacle Midstream. Phillips said the $550 million deal was a strategic move to expand its natural gas gathering and processing assets in the Midland Basin.

“Pinnacle is a bolt-on asset that advances our wellhead-to-market strategy and complements our diversified and integrated asset portfolio,” Phillips 66 Chairman and CEO Mark Lashier said in a press release.

Pinnacle’s assets include the Dos Picos natural gas gathering and processing system: a 220 MMcf/d gas processing plant, 80 miles of gathering pipeline and 50,000 dedicated acres through one of Phillips 66’s focus basins. Phillips said Dos Picos is scalable toward a second 220 MMcf/d gas plant and has strong connections with its downstream infrastructure.

Pinnacle Midstream assets
(Source: Rextag)

The transaction is expected to close in the middle of 2024, according to the release.

“Pinnacle has established itself as one of the premier midstream providers in the Midland Basin, with a top-notch talented team, first-class operations and infrastructure and world-class customers,” Pinnacle CEO J. Greg Sargent stated in the press release.

A week before the sale was announced, a Pinnacle executive said the company had been built with eventual integration with other infrastructure companies in mind.

Pinnacle Midstream partner and CCO Drew Ward discussed midstream M&A in the Permian on a panel at Hart Energy’s SUPER DUG Conference & Expo in Fort Worth, Texas, on May 15. Pinnacle, like many other private midstream companies, has worked to build a network that would be attractive to potential buyers.

“We have a hyper-focus in our business on checking the boxes on things that some of our peer companies around us would want to complement their business,” Ward said.

Analysts gave Phillips 66 fair reviews for the deal.

Firm Piper Sandler noted the move was unlikely to be “a strategic surprise for the market,” given that Phillips 66 executives discussed the need to increase the size of its midstream footprint after an earlier acquisition of DCP Midstream in June 2023. The deal is the first, but “unlikely the last” transaction as Phillips continues to grow its infrastructure.

Piper Sandler said the deal was likely positive for Phillips 66’ midstream business over the long term, but that investors may be “ambivalent on PSX's midstream business—generally preferring cash return to shareholders.”

In a report on the acquisition, TPH&Co analyst Matthew Blair wrote that the deal "looks like a good fit, but investors are expecting PSX to sell midstream assets rather than buy them."

The firm estimated the deal would generate $80 million in EBITDA and include about $20 million in synergy opportunities for Phillips.

“While the deal looks fine on its own, we suspect investors will react negatively to PSX’s decision on capital allocation,” Blair wrote, noting that Phillips 66 had earlier told investors the company planned to sell $3 billion of non-core assets.