Concho-Frontier JV to Bet on Permian Midstream Start-Up

After monetizing two of its Permian midstream assets for premium prices, Concho Resources Inc. CXO is set to make another infrastructure investment in the prolific play. The company is forming a joint venture (JV) with Frontier Midstream Solutions to build a crude gathering and storage services business, ‘Beta Crude Connector, LLC’.

Beta to Support Concho’s Growing Permian Output

Beta Crude Connector, a 50/50 partnership between Concho and Frontier, will comprise 100-mile gathering systems with 250,000 barrels of crude storage facilities and truck terminals. The initial transportation capacity of the pipeline system is 150,000 barrels of oil per day. The pipeline will carry the output from Permian to downstream pipelines, which have access to refineries and other delivery points.

Beta Crude Connector will aid in the transportation of Concho’s growing production in the Northern Midland Basin in the Permian play. While Concho has already signed a long-term contract to supply crude to the system, the partners of the JV are also seeking commitments from other explorers in the region. Construction of the system will begin post an open season this month, with the intent to commence the transportation of oil by mid-year.

Will Concho Monetize Beta as Well in Future?

With the Permian Basin being the largest hotspot for U.S. oil and gas producers, various energy companies have been investing large sums of money to bolster their presence in the region. Along with scaling up acreage and boosting drilling activities in the prolific play, many companies have poured in cash to develop the midstream infrastructure in the Permian Basin, which has been struggling with takeaway woes. The infrastructure investments made by firms in the red-hot shale region has proved to be quite a smart move, as many companies are snagging premium prices by selling these assets to other midstream-focused companies and private equity funds. 

In this regard, Concho recently inked a deal to jettison its stakes in Oryx Midstream. The Permian player, which holds a 23.75% interest in Oryx, will receive $300 million upon the closure of the deal,after repayment of the latter’s outstanding borrowings. The upstream player had received $157 million last year related to the recapitalization of Oryx. When combined with the $300 million from the latest move, Concho will receive $457 million in cash, which is 10 times of its investment in Oryx since 2015.

Further, in 2017, the company divested stakes in Alpha Crude Connector System to Plains All American Pipeline PAA for $1.25 billion. Alpha Crude Connector was the first midstream partnership between Frontier and Concho in 2014 to facilitate surging production in the Delaware Basin. Concho had invested $130 million in the project and received $800 million upon closure of the deal. 

Concho utilized the proceeds from the sale of midstream assets to strengthen its already strong financials and increase the company’s commitment toward returning value to its shareholders. Late last year, the company had announced its plans to initiate dividend payouts on a quarterly basis, starting from the first quarter of 2019. With balance sheet getting stronger and cash flows pouring in, the company may as well give investors another reason to cheer, with the authorization of a share buyback program going forward.

Midstream investments by Concho have always turned out to be profitable for the company as it has been able to cash in the assets for huge premium prices. Hence, going by its past successful attempts in monetizing infrastructure holdings, it would not come as a surprise if the Zacks Rank #3 (Hold) company cashes in on Beta for premium prices in the coming years.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amid the pipeline pinch in Permian, other explorers like Apache Corporation APA and Occidental Petroleum OXY also cashed in on their infrastructural bets last year for premium prices.

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Plains All American Pipeline, L.P. (PAA): Free Stock Analysis Report

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