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We Belong Together - Plains/Oryx Midstream Joint Venture Creates Permian Crude Juggernaut

The massive energy-industry dislocations caused by the COVID-19 pandemic forced every upstream, midstream, and downstream player to consider what it all meant for them and what they could and should do to weather the storm. A common theme emerged: management needed to delay or even jettison their plans for growth and instead focus on efficiency by cutting costs, working to maximize the revenue from every molecule, and seeking out opportunities to streamline and optimize their operations. A prime example of this push for efficiency came last week with the announcement by Plains All American and Oryx Midstream that each will contribute assets to a new, Plains-operated crude oil pipeline joint venture in the heart of the Permian’s Delaware Basin. Today, we review the plan and its rationale.

In the course of our lives, we’ve likely all had situations that invoked the phrase that begins, “the best laid plans …” And in early 2020, nearly all of us were simultaneously gob-smacked by that old saw as the pandemic stymied so much in our personal and professional lives as well as the global economy. The shock waves roiled the U.S. midstream sector, which in 2019 was wrapping up a massive infrastructure build-out to transport surging hydrocarbon production. The plan was to harvest cash flow from rising output on the newly built systems in the 2020s to paydown the sizable debt accumulated during the last half-decade and to reward shareholders. Then oil prices and production crashed, raising significant concerns about a possible infrastructure overbuild, elevated leverage, the creditworthiness of producers, and the stability of distributions. Like their upstream counterparts, midstream management teams quickly shifted from growth to efficiency, and considered how best to position themselves for what’s next.

Major energy-market disruptions often spur a spate of corporate bankruptcies and acquisitions, and that certainly happened with COVID — especially in the upstream sector, a topic we discussed in our blog Good Vibrations. Among midstreamers, two often-rumored candidates for marriage were privately backed Permian provider Oryx Midstream, which has a significant footprint, primarily in the Delaware Basin, and large, publicly held Plains All American, which has an extensive gathering and transportation system in the Permian to feed its interstate pipes and storage system. On July 13, they did announce a combination — not an acquisition of Oryx by Plains, but an agreement by both companies to contribute their assets to a Plains-operated, debt-free joint venture. Today, we look at the motives behind this pairing, explain the structure of the deal, analyze what it does and doesn’t do for the parties involved, and explore the implications for the Permian midstream market.

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