Enterprise Products Partners LP EPD

Enterprise Products Partners has agreed to acquire Navitas Midstream for $3.25 billion in cash, to be funded by cash on hand and credit facilities, and the deal is expected to close in the first quarter of 2022. Navitas’ assets include over 1 billion cubic feet per day of natural gas gathering capacity and represent Enterprise’s entry point into Midland gas and natural gas liquids processing, as its existing assets only include downstream pipes. We think the deal makes sense from a financial perspective, as Enterprise’s expected midpoint of $0.20 in distributable cash flow (DCF) per unit from Navitas in 2023 equates to a nearly 14% return on investment (about $441 million in DCF on a $3.25 billion investment). The relatively high returns are likely due to the recent construction of the assets (2018 to present), meaning they are likely located in some of the best areas of the Midland basin with breakevens below $40 a barrel, but also contributions from high oil and gas prices. We will maintain our fair value estimate and wide moat rating for Enterprise while we incorporate the deal into our model, likely alongside Enterprise’s upcoming fourth-quarter earnings, where management could also reveal more information about the contract structure. Where the fee floors are set in the contracts are particularly important to maintaining Enterprise's returns if near-term oil and gas prices decline substantially.