Williams Exits San Juan For D-J Basin In $2 Billion Swap

Williams Cos. Inc. (NYSE: WMB) is trading in its position in the San Juan Basin for entry into Colorado’s Denver-Julesburg (D-J) Basin in transactions worth more than $2 billion, the Tulsa, Okla.-based midstream company said July 31.

Harvest Midstream Co., an affiliate of Hilcorp Energy Co., agreed to acquire Williams’ San Juan assets located in the Four Corners area in New Mexico and Colorado for roughly $1.1 billion cash.

Separately, Williams said it formed a joint venture with private-equity firm KKR & Co. LP to purchase Discovery Midstream, which operates in the D-J Basin, from TPG Growth for about $1.2 billion. The transaction will be funded primarily through KKR’s energy and infrastructure funds, but analysts with Tudor, Pickering, Holt & Co. (TPH) said the “attractive valuation” Williams received for its Four Corners assets will also facilitate the company’s D-J buy-in.

Based in Dallas, Discovery operates infrastructure and related facilities across more than 250,000 dedicated acres in the Niobrara and Codell formations of southern D-J Basin primarily in Weld and Adams counties, Colo.

Discovery’s natural gas and crude oil gathering pipelines, cryogenic gas processing, liquids handling and crude oil storage assets include a 60 million cubic feet per day (MMcf/d) gas processing plant. An additional 200 MMcf/d plant is also expected to be in service by year-end 2018.

Alan Armstrong, president and CEO of Williams, said the acquisition of Discovery will add more than 1 billion cubic feet per day (Bcf/d) of gas processing to the company’s portfolio to “better serve producers in the D-J Basin.”

The acquisition will also unlock synergies including between the Discovery assets and Williams’ downstream businesses via the D-J Lateral of Overland Pass Pipeline (OPPL), Armstrong added.

“We will now have the opportunity to integrate output from these acquired assets with production from our existing processing footprint in the West segment into our advantaged downstream assets, including OPPL and the Conway fractionator and storage facilities,” he said in a statement.

Following close of the acquisition, expected in early August, KKR will own a 60% stake in the Discovery midstream business. Meanwhile, Williams will be the operator of Discovery and hold a 40% stake.

Williams said it expects the Discovery transaction to represent a 5 to 6 times multiple to the company’s investment inclusive of additional investments of about $250 million between 2018 and 2020 and based on expected 2020 EBITDA forecast.

“Lofty targets for EBITDA generation of about $240 million to $280 million by 2020 [pending $250 million of incremental capital], screen attractive should they be achieved but even significant risking results in value creation vs. high-multiple about 13 to 14 times EBITDA San Juan sale,” TPH analysts said in a July 30 research note.

In the San Juan Basin, Harvest will acquire Williams’ Four Corners system encompassing more than 3,700 miles of pipeline, two gas processing plants and a CO₂ treating facility. The assets, located in San Juan and Rio Arriba counties, N.M., and La Plata County, Colo., have an inlet gathering capacity of 1.8 Bcf/d of gas.

Harvest’s affiliate, Hilcorp, acquired 1.3 million acres in the San Juan Basin last year from ConocoPhillips Co. (NYSE: COP) for up to $2.8 billion. Hilcorp estimated 2017 production from the San Juan assets could reach about 115,000 boe/d, consisting of about 80% natural gas and 20% NGL.

Armstrong said the Four Corners area has been an important part of Williams dating back to the company’s acquisition of Northwest Energy in 1983.

“However, pressure on natural gas pricing from adjacent basins like the Permian, demand a new basin model that consolidates and integrates upstream production with midstream operations in a way that optimizes throughput and lowers cost,” he said. “We believe that Harvest is ideally positioned to achieve this integration, and Williams can redeploy the proceeds into improved opportunities for growth.”

In 2017, the modified EBITDA contribution from Williams’ Four Corners assets was about $85 million and is forecast to be $82 million annualized in 2018, the company said.

Williams’ lead financial adviser for the Four Corners divestiture was Morgan Stanley and Davis Polk was its legal counsel.

For the Discovery acquisition, Simmons was the lead financial adviser to both Williams and KKR. Gibson Dunn served as legal counsel to Williams, and Simpson Thatcher & Bartlett was legal adviser to KKR. Vinson & Elkins was legal adviser TPG Growth and Jefferies was its financial adviser.

The transactions follow Williams’ agreement to buy out the remaining stake in its MLP, Williams Partners LP (NYSE: WPZ), in a $10.5 billion all-stock deal expected to close this fall.

Emily Patsy can be reached at epatsy@hartenergy.com.