The tally of midstream deals, many centered on shale plays, continues to grow with the acquisition of Delaware Basin gas gatherer and processor Nuevo Midstream LLC.

Western Gas Partners LP (NYSE: WES), formed in 2008 by Anadarko Petroleum Corp. (NYSE: APC) to manage and develop midstream energy assets, said Oct. 28 it would buy Nuevo for $1.5 billion in cash.

The midstream transaction is the latest in a slew of megadeals—those valued at more than $1 billion—in the U.S. market. A single transaction reached $7.7 billion in the third quarter of 2014. (See: Midstream Mergers Keep On Rolling.)

Nuevo's assets include a 300 million cubic feet per day (MMcf/d) cryogenic processing complex with an additional 400 MMcf/d of processing capacity scheduled to go online 2015. The company also operates 275 miles of gathering pipeline, 1,800 gallons per minute of amine treating capacity and four compressor stations.

The assets handle production from Reeves, Loving and Culberson counties, Texas, and Eddy and Lea counties, N.M.

Nuevo’s assets are extremely valuable to Western due to their strategic location in the Delaware Basin and Anadarko's significant acreage position and development plans in the area, said Don Sinclair, Williams CEO. The company was formed in April 2011 with an initial $65 million equity commitment from EnCap Flatrock Midstream and management.

“The Nuevo management team has done an excellent job in utilizing their first-mover advantage to build a gathering and processing system that has over 150,000 dedicated acres plus volumetric commitments from high-quality producers," Sinclair said. "Our top priority will be to provide excellent service to existing and future customers in a safe and reliable manner."

More than 70% of Nuevo's gross margin is fee-based. Following the acquisition, the partnership expects that over 95% of its consolidated gross margin will be either fee-based or covered under its fixed-price agreements with Anadarko.

The Western Partnership expects the acquisition to be accretive to its distributable cash flow per unit in 2015. It will partially finance the acquisition through the issuance to Anadarko of $750 million of Class C units, which will receive distributions in the form of additional Class C units until the end of 2017.

Due to the terms of a joint venture agreement between Anadarko and a third party, the partnership will immediately offer the third party the right to acquire a 50% interest in Nuevo. The third party is required to respond to the partnership's offer within 30 days of receiving notice, and will have an additional 30 days to fund its share of the purchase price if it accepts the offer. As of Sept. 30, the partnership had $1 billion of available capacity under its revolving credit facility and the partnership is prepared to purchase 100% of Nuevo if the third party does not participate.

"We are buying an early stage asset that we believe will deliver significant growth as the basin continues to develop," Sinclair said, noting the partnership estimates that the purchase price represents an approximate 8.5 times multiple of the assets' forecasted 2016 EBITDA.

"Both the current robust level of drilling activity and Anadarko's recent success in the area fuel our optimism regarding the further potential of the Delaware Basin, which has quickly become one of the most prolific resource plays in North America," he said.

Jay Lendrum, president and CEO of Nuevo, said the company’s work in the Delaware Basin was built on the right vision, the right people and the right financial partner to be successful.

“Our strategy was to enter the Delaware Basin early, execute quickly to get sufficient infrastructure in place ahead of drilling schedules, and continue building on our first-mover advantage,” Lendrum said. “The tireless work, unwavering focus and dedication of all our employees allowed us to build a world-class system and deliver excellent service to our customers.”

Dennis Jaggi, one of EnCap Flatrock Midstream’s three managing partners and a member of Nuevo’s board of directors, said the firm’s success “always begins with investing in the right people.”

“This transaction is a testament to the value of this basic strategy,” he said.

Barclays is serving as sole financial adviser to Nuevo. Vinson & Elkins LLP is acting as the company’s legal adviser. Thompson & Knight LLP serves as legal counsel to EnCap Flatrock Midstream. Akin Gump Strauss Hauer & Feld LLP is legal adviser to Western Gas.

The partnership expects the acquisition will close in the fourth quarter of 2014, subject to regulatory approval and customary closing conditions.

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