8-K: Delek Logistics to Acquire H2O Midstream for $230 Million, Expanding Permian Basin Footprint

Delek Logistics Partners, LP (DKL) has agreed to acquire H2O Midstream for $230 million, bolstering its water disposal and recycling operations in the Permian Basin.

Summary

• Delek Logistics Partners, LP (DKL) is set to acquire 100% of the limited liability company interests in H2O Midstream Intermediate, LLC, H2O Midstream Permian LLC, and H2O Midstream LLC.
• The purchase price is $230 million, which will be paid through a combination of cash and preferred equity interests of DKL.
• A deposit of approximately $23 million has already been paid by DKL.
• The transaction is expected to close by the end of 2024, subject to customary closing conditions and regulatory approvals.
• The acquisition is expected to be immediately accretive to DKL's distributable cash flow per share in 2025.
• The acquisition is valued at approximately 5 times run-rate EBITDA, including synergies.
• The deal includes $160 million in cash at closing and $70 million in convertible preferred equity redeemable for equity at a 20% premium at DKL's option.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook with a strategic acquisition that is expected to be accretive and synergistic. The financial details are clear and the future outlook is optimistic.

Positives

• The acquisition supports DKL's strategy of providing a full midstream service solution.
• There is significant overlap with DKL's existing Midland operations, creating cost and revenue synergies.
• The acquisition is expected to be immediately accretive to DKL's distributable cash flow per share in 2025.
• The deal provides a platform for additional growth opportunities in the Permian Basin.
• The acquisition is expected to increase DKL's third-party cash flow by approximately $70 million.

Risks

• The closing of the transaction is subject to customary closing conditions and regulatory approvals, which may not be obtained.
• The expected synergies and accretion to distributable cash flow may not be fully realized.
• The integration of H2O Midstream's operations may present challenges.
• The convertible preferred equity may be redeemed for equity, potentially diluting existing shareholders.

Future Outlook

The acquisition is expected to enhance DKL's position as a full-service midstream provider in the Permian Basin, with significant growth opportunities and increased third-party cash flow.

Management Comments

• The acquisition supports core strategy of providing a full midstream service solution to existing and new 3rd party customers.
• There is significant overlap with DKLs existing Midland operations.
• The acquisition is immediately accretive to 2025E DCF /share.
• There is an opportunity to add additional water assets around the combined Midland footprint.

Industry Context

This acquisition reflects a trend of consolidation in the midstream energy sector, particularly in the Permian Basin, as companies seek to expand their service offerings and capture synergies.

Comparison to Industry Standards

• The acquisition multiple of approximately 5x run-rate EBITDA is within the range of recent midstream transactions.
• The use of a combination of cash and preferred equity is a common financing structure for acquisitions in this sector.
• The focus on the Permian Basin aligns with the industry's emphasis on high-growth production areas.
• The stated goal of increasing third-party revenue is a common objective for midstream companies seeking to diversify their customer base.

Stakeholder Impact

• Shareholders of DKL are expected to benefit from the accretive nature of the acquisition.
• Employees of H2O Midstream will transition to DKL.
• Customers of both DKL and H2O Midstream will have access to a broader range of services.
• Suppliers of both companies may see increased business opportunities.

Next Steps

• The transaction is subject to customary closing conditions and regulatory approvals.
• The companies will work towards closing the acquisition by the end of 2024.
• DKL will integrate H2O Midstream's operations into its existing business.
• DKL will seek to realize cost and revenue synergies from the acquisition.

Key Dates

Keywords

Delek Logistics, H2O Midstream, acquisition, Permian Basin, water disposal, recycling, midstream, EBITDA, distributable cash flow, convertible preferred equity