Pipeline Deal Positions Plains, Enbridge For Permian Recovery

Plains All American (PAA) and Enbridge (ENB) have jointly acquired Western Midstream’s (WES) 15% interest in the Cactus II crude oil pipeline for $265 million. While Cactus II has a thorny history, the transaction positions PAA and ENB to ride a recovery in Permian Basin crude oil production, according to our Crude Hub Model.

The companies announced the transaction prior to Plains’ 3Q22 earnings call. Cactus II transports crude oil from the Permian to refiners and terminals near Corpus Christi, including ENB’s Ingleside Energy Center. The deal values the pipeline at $1.77 billion, implying an EBITDA multiple of 14x based on the trailing 12 months of financials filed with the Federal Energy Regulatory Commission. PAA now controls 70% of Cactus II, and ENB holds the remaining 30%.

Cactus II has had a rough go since it began operations in late 2019. Shipments and cash flows were initially strong in 4Q19 and 1Q20, but pandemic-related supply issues, including deficiency shipments from its anchor shipper, Trafigura, have plagued the pipeline. The resulting glut of Permian pipeline egress forced Cactus II to cut its walk-up tariff and to heavily discount its incentive rates, which drove down the pipeline’s average rate from $1.12/bbl in 1Q20 to $0.75/bbl in 2Q22.

Despite these difficulties, we have a positive outlook on Cactus II and expect flows will continue to improve. Data from East Daley’s Crude Hub Model projects Cactus II will transport ~547 Mb/d in 4Q22 and more than 635 Mb/d by YE2025. Additionally, we expect Cactus II to see its average tariff rate improve due to tightening Gulf Coast egress capacity, widening basis differentials, annual tariff rate increases, and increasing walk-up volumes. If we value the transaction based on 2023 EBTIDA projections, we calculate a 10.7x multiple, which continues to improve to a sub-8x multiple as basin takeaway tightens.

While the price may seem steep, we see long-term value in the acquisition for PAA and ENB. The transaction strengthens their Permian positioning and secures additional supply for ENB’s Ingleside Energy Center (previously owned by Moda Midstream).