Phillips 66 has entered into an agreement to acquire Pinnacle Midland Parent LLC from Energy Spectrum Capital for $550 million in cash, marking a significant expansion of its midstream operations in the Permian Basin. This transaction is anticipated to close by mid-2024, subject to regulatory approval, and will provide Phillips 66 with ownership of the newly constructed Dos Picos natural gas gathering and processing system. The Dos Picos facility boasts a processing capacity of 220 million cubic feet per day (MMcfpd), complemented by an 80-mile gathering pipeline network.
Phillips 66 emphasized the strategic importance of this acquisition, highlighting the scalability of the Dos Picos processing complex. According to the company, the existing infrastructure can be expanded to include a second 220 MMcfpd gas plant, which would integrate seamlessly with Phillips 66’s current downstream operations. Pinnacle had previously announced on July 11, 2023, that it had reached a final investment decision to double the processing capacity at Dos Picos by constructing a second processing train, with operations expected to commence in the fourth quarter of 2024.
Mark Lashier, Phillips 66’s Chair and Chief Executive Officer, underscored the strategic benefits of the acquisition. “We are growing our Midstream business in the Permian to further strengthen and expand our service offerings to customers while driving operational and commercial synergies,” Lashier stated. He added, “Pinnacle is a bolt-on asset that advances our wellhead-to-market strategy and complements our diversified and integrated asset portfolio.”
Lashier further articulated that the transaction aligns with Phillips 66’s long-term objectives, which include expanding its natural gas liquids (NGL) value chain, maintaining disciplined capital allocation, and creating sustainable value for shareholders. The acquisition is, however, contingent upon the mandatory federal antitrust review process.
This acquisition by Phillips 66 follows a series of high-profile mergers and acquisitions in the U.S. oil and gas sector that have drawn attention from lawmakers concerned about market consolidation and its potential impact on competition. Notably, Exxon Mobil Corporation announced on May 3 that it had completed its $64.5 billion all-stock acquisition of Pioneer Natural Resources Company after receiving clearance from the Federal Trade Commission (FTC) following a detailed “second request” investigation under the Hart-Scott-Rodino Antitrust Improvements Act.
The Hart-Scott-Rodino Act mandates that parties involved in certain mergers and acquisitions notify the FTC and the Department of Justice, triggering a review period typically lasting 30 days. If the FTC determines that further scrutiny is warranted, it can issue a second request for additional information and, if necessary, seek a court injunction to block the transaction if antitrust violations are suspected.
On January 22, the FTC announced modifications to enhance the scrutiny of mergers and acquisitions under the Antitrust Improvements Act. These changes included raising the reporting threshold for proposed transactions from $111.4 million to $119.5 million.
In addition to ExxonMobil’s acquisition of Pioneer, APA Corporation also completed its $4.5 billion acquisition of Callon Petroleum Company on April 1. Meanwhile, Chevron Corporation’s $60 billion all-stock purchase of Hess Corporation and Diamondback Energy Inc.’s $26 billion cash-and-stock acquisition of Endeavor Energy Resources LP are still pending, both having received second requests from the FTC for further investigation.
The recent surge in major mergers has prompted concerns among U.S. lawmakers. On November 1, 2023, a group of 23 U.S. Senators sent a letter to the FTC urging a thorough investigation of the Chevron and ExxonMobil mergers, citing fears that increased consolidation could reduce competition and lead to higher consumer prices and decreased production.
The lawmakers highlighted the historical context of consolidation in the oil and gas industry, referencing a period of significant merger activity in the 1990s. During this time, over 2,600 mergers took place across various segments of the U.S. petroleum industry. The number of major U.S. energy companies shrank dramatically from 19 in 1990 to 9 by 2001, largely due to merger activity. Notable mergers from that era included Exxon and Mobil in 1999, and Chevron with Texaco in 2001, following previous acquisitions involving Gulf Oil and Getty Oil.
The Senators’ letter cited a Senate report from May 2002 that discussed how consolidation had facilitated anticompetitive coordination within the industry, effectively creating an oligopoly where a few firms could maintain high prices without undermining the market. They also referenced a 2004 Government Accountability Office (GAO) investigation that found specific mergers, such as those involving Marathon-Ashland and Shell-Texaco, led to wholesale gasoline price increases ranging from 0.39 to 5.00 cents per gallon.
The legislators argued that post-merger companies often cut back on drilling and upstream production, even during periods of high prices, further exacerbating the effects of reduced competition. These historical patterns and current merger trends underscore the need for vigilant regulatory oversight to ensure that market competition is preserved, and consumer interests are protected.
As Phillips 66 moves forward with its acquisition of Pinnacle, it will need to navigate these regulatory landscapes carefully. The company’s strategy to enhance its midstream capabilities and integrate new assets into its existing infrastructure will likely face scrutiny from regulators and lawmakers alike, reflecting the broader industry dynamics and ongoing debates about the impact of consolidation on market competition and consumer prices.
