The deal is the latest in a series of midstream M&A that has broadly seen infrastructure company consolidation since December 2022. The transactions have included some of the most expensive 2023, most recently including Energy Transfer mid-August deal to acquire Crestwood Equity Partners for $7.1 billion.
Under the terms of Western Midstream’s agreement, the company will acquire Denver’s privately held Meritage’s large-scale natural gas gathering and processing business in the Powder River Basin of Wyoming.
Meritage’s assets, located in Converse, Campbell, and Johnson counties, Wyoming, include approximately 1,500 miles of high- and low-pressure natural gas gathering pipelines. Meritage’s assets have approximately 380 MMcf/d natural gas processing capacity as well as the Thunder Creek NGL pipeline — a 120 mile, 38 MBbl/d line that connects to Meritage’s processing facilities.
Meritage’s assets are supported by more than 1.4 million dedicated acres from a diverse set of majority investment-grade counterparties, with an average remaining contract life of approximately eight years.
Colton Bean, an analyst at Tudor, Pickering, Holt & Co., said the purchase prices represents a multiple of 5x to 6x of estimated 2024 pre-synergy adjusted EBITDA.
“Meritage serves various producers in the basin, including EOG, Devon, and Peak Powder River,” Bean wrote in a Sept. 5 commentary. “As of July 2023, Meritage's plant inlets were at 244 MMcf/d, representing approximately 65% utilization, marking an increase from 185 MMcf/d at the beginning of the year. Furthermore, based on the expected free cash flow benefits, WES's management plans to recommend a base distribution increase of $0.0125 per unit, equivalent to an annualized increase of $0.05 per unit, following the completion of the transaction.”
Western Midstream expects the transaction to close during fourth-quarter 2023 but said it would not update its 2023 adjusted EBITDA guidance given the “uncertain timing of closing within the fourth quarter.”
Bean said that investors may question the allocation of capital to a basin that Western Midstream has not been focused on recently, “particularly when facing infrastructure constraints in the Permian Basin.”
Following the integration of the Meritage assets, Western Midstream said it will be well positioned to compete for additional acreage dedications and business development opportunities from offset producers in the basin, the company said.
Michael Ure, president and CEO of Western Midstream, said Meritage’s assets meaningfully expand the company’s financial and operational scale of its existing Powder River foot print.
“The Powder River Basin has attracted investment from some of the largest E&P companies due to the basin’s multi-stacked pay horizon potential,” Ure said. “Throughout 2023, a combination of large, independent E&Ps and well-capitalized, private companies have operated thirteen to fourteen rigs, on average, throughout the basin.”
Citi served as financial adviser and Gibson, Dunn & Crutcher LLP served as legal adviser to Western Midstream. Jefferies LLC served as financial adviser and Vinson & Elkins LLP served as legal adviser to Meritage.
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