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Phillips 66 makes buyout offer for Colorado’s biggest oil and gas employer

That enterprise value makes Phillips 66’s increased stake worth about $5.6 billion.

Houston oil giant Phillips 66 is offering to buy the common shares of Denver-based DCP Midstream LP and consolidate ownership of the natural gas processing and pipeline business that it jointly owns today.

DCP Midstream (NYSE: DCP), currently Colorado’s largest oil and gas employer, would be merged into a Phillips 66 subsidiary and no longer be a standalone joint venture.

Phillips 66 (NYSE: PSX) offered $34.75 late Wednesday for each outstanding common unit in DCP Midstream it doesn’t own already.

The offer coincided with a restructuring that increased Phillip 66’s ownership of the DCP Midstream parent company, which is a joint venture of Phillips 66 and Canada-based pipeline giant Enbridge Inc. (NYSE: ENB), and handed management of the joint venture to Phillips 66.

“We are growing our integrated [natural gas liquids] business to further strengthen our competitive position, while driving operational and commercial synergies,” said Mark Lashier, president and CEO of Phillips 66, in a statement. “DCP is a valued business in our portfolio and enhances our existing value chain from wellhead to market, creating a platform for future NGL growth.”

Phillips 66 owns 56.5% of DCP Midstream common units today after the restructuring. There were 208.4 million units of DCP Midstream as of July 29, and the offer valued the units at $7.2 billion.

It isn’t clear what the transaction would mean for DCP Midstream in Denver, where it’s the local oil and gas industry’s biggest employer.

The business is one of the largest U.S. transporters and processors of natural gas and associated liquids, operating pipelines and 35 natural gas processing plants across nine states.

Its systems gather and transport natural gas products from oil companies’ wells, processing natural gas for distribution into regional pipelines and separating out liquids — products such as propane and liquids used in plastics production — and selling them for refining.

DCP Midstream is headquartered in the south Denver suburbs and has a technology and operations office downtown. About 1,800 people work for the company nationally.

It’s a key handler of natural gas and pipelines in the Denver-Julesburg Basin, the oil-rich region north and east of the Denver metro area where the bulk of Colorado crude oil is produced.

DCP Midstream also is a major gas processor and handler of natural gas liquids in the Permian Basin region of West Texas, the largest oil-producing area in the country.

The company generated $3.8 billion in second-quarter revenue from its two lines of business, logistics and marketing of natural gas liquids and the gathering and processing of natural gas.

DCP Midstream predicted earlier this year that oil and gas companies in its two strongest regions, the Denver-Julesburg Basin of northeast Colorado and Texas’ Permian Basin, would increase oil and gas production volumes by 2% to 5% in 2022.

Phillips 66’s restructuring of the DCP Midstream joint venture saw the oil giant pay $400 million cash and swap most of its interest in Gray Oak Pipeline, a large new pipeline system in Texas, to Enbridge in exchange for upping Phillips 66’s economic interest in DCP Midstream to 43% and assuming oversight and management of the joint venture.

Common stock investors reacted positively to the news of the Phillips 66 offer to buy out the DCP Midstream’s remaining common units. The stock’s share price jumped 8%, to just over $38 per share in early Thursday trading, since before the buyout offer was announced.

DCP Midstream’s business is worth $13 billion now, estimated Ajay Bakshani, senior capital markets analyst at East Daley Capital, a midstream industry analysis firm based in Greenwood Village.

That enterprise value makes Phillips 66’s increased stake worth about $5.6 billion.

As a refiner and part owner of DCP Midstream, plus part owner of some pipelines that DCP uses, consolidating ownership of DCP has notable value for Phillips 66, Bakshani said.

“The deal and subsequent buyout offer makes strategic sense for PSX as it will own 100% of the Sand Hills and Southern Hills NGL pipelines,” he said, in a note Thursday. “Vertical integration will eliminate the red tape between gas processing plants, NGL pipelines, and downstream fractionation agreements.”

Bakshani estimates that DCP Midstream’s business will grow to generate almost $2 billion in earnings before taxes, interest payments and depreciation next year.

Wednesday’s restructuring also swapped Phillips 66’s interest in Gray Oak Pipeline, cutting Phillip 66s stake from 42% to just over 6%, while Enbridge’s stake rose to 58.5%. In return Enbridge gave up more than half of what it owned in the DCP Midstream joint venture, reducing it to a 13.2% stake.

Phillips 66 opened the Gray Oak Pipeline in 2020, saying it was planned to transport 900,000 barrels of crude oil per day. The system connects Texas’ Permian Basin and the Eagle Ford oilfields to the state’s major Gulf Coast refinery hubs.

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