Permian Basin Drillers Continue To Cash In On Their Infrastructure Bets

Oil and gas companies have poured billions of dollars into developing the Permian Basin over the last several years. In addition to buying land and drilling more wells, many have invested in building out the necessary midstream infrastructure to move their growing production out of the region. That infrastructure investment has proven to be a smart one, as an increasing number of drillers are cashing in on these assets by selling them to private equity funds or midstream-focused companies for a significant premium to their initial investment.

Concho Resources (NYSE:CXO) and WPX Energy (NYSE:WPX) are the latest to cash in on a midstream investment; they both recently sold their stake in Oryx Midstream to private equity fund Stonepeak Infrastructure Partners. These sales highlight the value oil and gas producers are creating by investing in early-stage midstream developments.

Ringing the register

Stonepeak Infrastructure Partners is buying Oryx Midstream from drillers Concho Resources and WPX Energy as well as private equity funds Quantum Energy Partners and Post Oak Energy Capital for $3.6 billion. Oryx operates oil gathering and transportation systems that move crude from wells in the Delaware Basin to longer-haul pipelines that take it out of the region.

Concho owns a 23.75% stake in the Oryx I gathering system and will get $300 million at closing. When combined with the $157 million it already received last year from this investment, Concho will have hauled in $457 million in cash, which is 10 times the capital it invested in Oryx I since December 2015. It's the second time in recent years that Concho has cashed in on a midstream investment; the company sold its stake in the Alpha Crude Connector System to Plains All American Pipeline (NYSE:PAA) in 2017 for $1.25 billion. The company invested $130 million into that system and received $800 million in cash at closing. That sale not only gave Concho a huge windfall, it also saved it having to continue investing capital in expanding that system, which is now the responsibility of Plains All American.

WXP Energy, meanwhile, owned a 25% interest in Oryx II and will receive $350 million in cash from the sale. The company plans to use that money to bolster its balance sheet. In addition to the cash proceeds, WPX Energy will save $40 million, which it would have had to invest in expanding the system this year. Because of that, the company estimates that its operations will generate free cash flow this year, which is ahead of schedule. That could enable WPX Energy to move up its timetable for returning cash to shareholders -- such as by joining Concho in initiating a dividend or share repurchase program -- which it initially targeted for 2021. It's WPX Energy's second midstream sale of the year, as it sold its 20% interest in the Agua Blanca natural gas pipeline in February. The company also cashed in on some midstream assets in 2017 by forming a joint venture with Howard Energy Partners, which paid it $300 million in cash for a 50% interest in some of its oil gathering and natural gas processing infrastructure.

Quietly building midstream value

Several other oil and gas companies are investing in midstream infrastructure in the Permian, which could create future value for investors. ExxonMobil (NYSE:XOM), for example, recently partnered with Plains All American to build a major oil pipeline to take crude out of the region. In addition to that, Exxon has the option to buy a 50% stake in a regional natural gas pipeline under development by another midstream company. These projects are part of Exxon's strategyto invest more than $2 billion to expand midstream infrastructure in the Permian to support its ambitious growth plan.

Meanwhile, Diamondback Energy (NASDAQ:FANG) has been investing in its Rattler Midstream subsidiary. Not only has Diamondback been building oil gathering pipelines, the company also has a 10% stake in the EPIC oil pipeline that's currently under construction. At some point, Diamondback could monetize Rattler Midstream by either selling it to a third party or completing an initial public offering, which is the route several other peers went to unlock the value of their midstream assets.

Keep an eye on what lies underneath

It can pay for investors to drill down deeper when looking at oil stocks, since some companies have quietly been investing in valuable midstream assets that they could cash in on. Both Concho and WPX Energy have done so a few times, which has given them cash windfalls that they've been able to use to bolster their balance sheets and reinvest in their core operations. That's leading others to follow in their footsteps, which sets them up for a potentially sizable future payday.

This article originally appeared in The Motley Fool.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.