Energy Transfer Acquiring Lotus Midstream Is A Strong Bolt-On Move (NYSE:ET) - Seeking Alpha

Energy Transfer Acquiring Lotus Midstream Is A Strong Bolt-On Move (NYSE:ET) | Seeking Alpha

Energy Transfer Acquiring Lotus Midstream Is A Strong Bolt-On Move
Energy Transfer LP (ET) 57 Comments

Summary

- Energy Transfer just announced it will acquire Lotus Midstream for a combination of newly issued units and cash.
- This will substantially increase Energy Transfer's footprint in the crude space and add 3,000 miles of takeaway capacity in the Permian.
- Energy Transfer continues to grow through acquiring smaller companies that fit into their infrastructure footprint to drive revenue and Adjusted EBITDA for unitholders.

zorazhuang

News broke this morning that Energy Transfer (NYSE: ET) would be acquiring Lotus Midstream. The price tag of this deal is $1.45 billion, and ET will be issuing 44.5 million common units and allocating $900 million of its cash to finance the acquisition. This is a bolt-on purchase as Lotus Midstream's assets create strong synergies to ET’s existing infrastructure while falling into their wheelhouse. ET will gain the Centurion Pipeline system, which encompasses roughly 3,000 miles of pipelines and 1.5 million bpd of storage capacity throughout major production areas of the Permian Basin. In addition to the Centurion Pipeline system, ET will integrate the Lotus Midstream Midland Terminal, which consists of two million barrels of crude storage and additional connectivity. Indirectly, ET will also gain a 5% stake in the Wink-to-Webster pipeline, which is a 650-mile system that transports just over one million bpd of crude from the Permian to the Gulf Coast. Some have been critical of ET’s expansion through acquisitions in the past, but just like the Enable Midstream deal, this will be positive for ET and its unitholders. The Permian is the best basin for crude production in the United States, and ET continues to build out its infrastructure, adding additional takeaway capacity for producers.
EIA

Understanding the different basins and their importance to the energy landscape

There are seven major basins in the United States, consisting of the Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian Basins, where exploration and production companies drill for oil and gas. The Permian is the most desirable basin to own acreage and drill in for crude. In March of 2023, the drilling data from the EIA indicates that 61.19% of the crude produced in the United States will originate from the Permian while, 12.52% will come from the Bakken basin, and 12.28% will come from the Eagle Ford basin. The Permian is the second most desirable basin for natural gas as 23.29% of the United States' production for natural gas will originate from the Permian as it trails the Appalachia basin, which contributes 36.26% of the country's natural gas production.

EIA

Once oil and gas are drilled and produced, it needs to be treated, stored, and transported to their final destination. Below is a map of every petroleum port, natural gas import and export facility, and petroleum refinery in the United States. The current natural gas import and export facilities are situated along the East and Gulf Coast, while petroleum ports are predominantly placed throughout the eastern half of the country. The refineries are scattered near the major basins and ports.
Fractracker

Below is a map where all of the crude and petroleum product pipelines are overlayed on the map in relation to the refineries, ports, and natural gas import and export facilities.

Fractracker

This is what the map looks like when all of the country's natural gas pipelines are overlayed into the map.

Fractracker

By acquiring Lotus Midstream, ET is entrenching itself even further into the heart of American energy. The reference case in the Annual Energy Outlook from the EIA projects that petroleum and other liquid production will slightly increase from now through 2050, and dry natural gas production will increase by roughly 20% through 2050. The EIA is also projecting that the United States will remain a net exporter of petroleum products and liquified natural gas (LNG) through 2050. By adding 3,000 miles of pipelines and 1.5 million bpd of storage capacity throughout major production areas of the Permian Basin, ET is setting itself up to be the transporter of choice as it’s infrastructure spans even further throughout the United States.

EIA

Boosting ET’s Capacity to drive Revenue and Adjusted EBITDA

In Q4 of 2022, ET generated $571 million of Adjusted EBITDA from its crude segment. ET’s crude transportation volumes averaged 4,272 MBbls/d, while its terminal volumes averaged 2,954 MBbls/d. YoY ET’s Adjusted EBITDA margins compressed by 1.7% but the amount of Adjusted EBITDA generated from the crude segment grew by $38 million or 7.13% YoY in Q4 of 2022. As margins compress, additional revenue is required to drive Adjusted EBITDA higher. Due to ET’s expansion in the Permian, the crude segment revenue increased by 28.13% YoY in Q4 2022.
Energy Transfer

Prior to the Lotus Acquisition, ET had 11,300 miles of pipe transporting crude and providing takeaway from the Permian of roughly one million bpd. ET’s crude pipelines are being increased by 26.55% and with a concentration of 3,000 miles throughout the Permian which is the most oil-rich basin in the country. As oil production is projected to increase over the next 27 years, it is logical that the Permian will play a major role in meeting the output projections from the EIA.

Conclusion

I think there will continue to be consolidation across the energy infrastructure industry. ET is the largest energy infrastructure company in North America and just made a strategic bolt-on acquisition. I am expecting that some will disagree with the move, but ET has a successful track record of acquiring and implementing smaller companies into their energy empire. ET is making sure that all roads lead to them, and as fossil fuel production is expected to increase, they will be getting a larger share of the pie. Through consolidation, there is more of a reason to contract services with ET as its system touches more terminals, storage facilities, refineries, and import/export facilities than any other company. ET continues to make sure its network is irreplaceable, and as the years go on, ET collects more revenue as each drop of oil and gas needs to be transported. I think this is a positive move as the cash used is a small fraction of the $13.09 billion of Adjusted EBITDA generated in 2022.

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Disclosure: I/we have a beneficial long position in the shares of ET either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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