Pipeline operator Plains All American Pipeline, L.P. (PAA - Analyst Report) announced that it has entered into a firm agreement to acquire the 50% interest that Occidental Petroleum (OXY - Analyst Report) holds in BridgeTex Pipeline Company LLC (“BridgeTex”) for $1.075 billion. This is a well thought out strategic move from the partnership to further expand its pipeline services in the Permian Basin.

Details of the Acquisition

Through this acquisition Plains All American Pipeline will own half of the stake in the pipeline, while the other half will be owned by Magellan Midstream Partners, L.P.  (MMP - Analyst Report).  Magellan Midstream Partners is also the operator of the BridgeTex pipeline.

Apart from other customary closing conditions, the deal will be subject to completion by Plains GP Holdings, L.P. (PAGP - Snapshot Report) of an underwritten secondary offering pursuant to which Occidental would sell a portion of its equity interest in Plains GP Holdings.

Plains GP Holdings is a publicly traded entity that owns an interest in the general partner and incentive distribution rights of Plains All American Pipeline, L.P.

What’s in the Permian Basin?

The Permian Basin is located in the western part of the U.S. state of Texas and the southeastern part of the state of New Mexico. It is one of the most prolific oil producing regions in U.S.  Per U.S. Energy Information Administration (EIA), the six formations in this region are responsible for its booming crude oil production.

The use of horizontal drilling technology in this basin has also contributed to the increase in oil production, which will go up going forward. This significant increase in production volumes will necessarily require pipeline services rendered by BridgeTex among others.

What's the Bigger Picture?

The BridgeTex Pipeline – a 300,000 barrel-per-day crude oil pipeline system – originates from Colorado City in West Texas. It complements the existing assets of Plains All American in this oil rich region.  BridgeTex Pipeline will connect PAA’s Basin Pipeline System as well as PAA’s Sunrise Pipeline at Colorado City. Sunrise Pipeline will have a capacity of 250,000 barrels per day and will come online in Dec 2014.

The new BirdgeTex pipeline will be an immediate cash flow generator, with 80% of the capacity already under long-term contracts. Once this pipeline operates in full capacity it is expected to add nearly 1.5% to Plains All American’ targeted 2015 distribution per unit.

To Sum Up

Plains All American Pipeline currently carries a Zacks Rank #4 (Sell). This midstream operator missed third-quarter 2014 earnings estimates by 3.9% primarily due to higher operating expenses.(read:  Plains All American Misses Earnings Estimates in Q3).

However, this BridgeTex deal will enable Plains All American Pipeline to have a significant presence in one the prolific oil producing regions of the U.S. and boost its earnings going forward.