Phillips 66 agreed to acquire Pinnacle Midland Parent LLC in an all-cash deal that would expand its natural gas gathering and processing operations in West Texas.
The Houston-based company agreed to pay $550 million to acquire Pinnacle from private equity firm Energy Spectrum Capital in a deal expected to close around mid-year. The acquisition would expand Phillips 66’s footprint in the Permian Basin’s prolific Midland sub-basin ahead of an anticipated surge in natural gas demand from export facilities along the Gulf Coast.
Five LNG projects are under construction along the Gulf Coast to increase U.S. export capacity from 14 Bcf/d to nearly 25 Bcf/d by the end of the decade.
“We are growing our midstream business in the Permian to further strengthen and expand our service offerings to customers while driving operational and commercial synergies,” said Mark Lashier, Phillips 66 CEO. “Pinnacle is a bolt-on asset that advances our wellhead-to-market strategy and complements our diversified and integrated asset portfolio. Further, this transaction aligns with our long-term objectives to build out our natural gas liquids (NGL) value chain.”
The Midland is the largest oil and second-biggest gas producing basin in the Lower 48. Crude producers ramped up in 2023 to meet mounting global demand at a point when OPEC and others scaled back. U.S. oil production reached record levels last year and held near there early in 2024. This, by extension, fueled near-record levels of associated gas production within the Permian. Associated gas is a byproduct of oil production.
The robust associated gas output intersected this spring with a spate of pipeline maintenance events that backed up supplies and created a glut that suppressed prices. Permian cash benchmark Waha spent much of the past two months trading in negative territory as a result.
But, as RBN Energy LLC analyst John Abeln noted, “the most restrictive phase of planned pipeline maintenance in the Permian Basin appears to be over” and Waha prices in recent sessions climbed into positive territory. This opened a window for traders to focus on the anticipated boom in liquefied natural gas demand, projects in the works to expand Permian takeaway capacity, and strengthening prices as summer approaches, Abeln said.
Henry Hub natural gas futures, coming off a weak run amid a mild winter, are rebounding this month as summer-like weather arrives early and National Weather Service forecasts call for above-average Lower 48 temperatures across June, July and August. Prompt month futures were up nearly 40% from the beginning of May through the close of trading Tuesday.
Weather conditions “are now firmly bullish for Northern Hemisphere natural gas markets,” analysts at Mobius Risk Group said.
Phillips 66 said it views the Pinnacle deal as a strategic move to capitalize on expected natural gas industry strength in coming years.
Pinnacle’s assets include the recently built Dos Picos natural gas gathering and processing system. This includes a 220 MMcf/d gas processing plant, 80 miles of gathering pipeline and 50,000 dedicated acres. The Dos Picos processing complex and related infrastructure is “easily scalable toward a second 220 MMcf/d gas plant and integrates well into Phillip 66’s existing downstream infrastructure,” the company said.
Phillips 66 operates multiple NGL fractionation plants as well as natural gas and NGL storage facilities and 22,000 miles of pipelines.
The deal comes on the heels of a robust year in 2023 and strong start to this year for energy M&A.
The surge in 2023 was punctuated by ExxonMobil’s $65 billion purchase of Pioneer Natural Resources Co. and Chevron Corp.’s $60 billion acquisition of Hess Corp.
Early this year, Chesapeake Energy Corp. and Southwestern Corp. said they would merge in a $12 billion deal.
