Diamondback Energy's (FANG) move to raise its stake in Deep Blue Midland Basin, a produced-water infrastructure platform in Texas, and gain operatorship offers greater control over a cost that is becoming more important in the Permian Basin, UBS Securities said Tuesday in a report.
On Tuesday, Five Point Infrastructure agreed to sell its 70% stake in Deep Blue to Diamondback and KKR (KKR) for an undisclosed cash amount. The equity value of the deal is about $2.1 billion, Bloomberg News reported, citing a person familiar with the matter. Diamondback's ownership interest will increase from to 50% from 30%, UBS said.
The deal fits Diamondback's approach of investing in infrastructure to improve upstream operations, then capturing value through an exit at a higher valuation, UBS said. Deep Blue handles nearly 2 million barrels per day of water for Diamondback's Midland operations, which should ease integration, the report said.
Deep Blue may expand into industrial and power-generation markets, supporting Diamondback's 1-gigawatt power and data-center developments, UBS said. Longer term, a sale or a transfer to Diamondback's majority-owned royalty affiliate, Viper Energy (VNOM), could diversify the affiliate's cash-flow stream and make its business mix more comparable to that of higher-multiple royalty companies, the report said.
UBS raised its price target on Diamondback stock to $263 from $260 and maintained its buy rating.
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