Diamondback, KKR to acquire Permian water infrastructure firm Deep Blue

Diamondback Energy (NASDAQ: FANG) and global investment firm KKR announced this week that they had agreed to jointly acquire Five Point Infrastructure’s 70% stake in Deep Blue Midland Basin. In the announcement, they described Deep Blue as the leading full-cycle water infrastructure platform in the Permian Basin’s Midland sub-basin.

Diamondback already owns a 30% interest in Deep Blue, so once this transaction closes, Diamondback and KKR will jointly own 100% of the company. The announcement did not specify a purchase price but separate reports by Reuters and Bloomberg cited a source familiar with the matter as putting the equity value of the deal at around $2.1bn. According to Bloomberg, this will be paid in cash. Meanwhile, Reuters cited Truist Securities analysts as estimating Diamondback would contribute about $602mn to increase its ownership to 50% from 30%, while KKR ⁠will pay about $1.51bn for the remaining 50%. This is assuming that both buyers pay the same pro-rata price, with no acquisition-level financing, fees ⁠or earnout settlement, Reuters added.

Deep Blue was formed in 2023 as a joint venture between Diamondback and Five Point. It operates an integrated water infrastructure network that provides services across the full water lifecycle, including sourcing, transportation, storage, recycling and disposal, according to the announcement. The company was described as having a “large” base of exploration and production customers, which it serves by helping them to manage water resources while enabling greater water reuse and reducing reliance on freshwater supplies.

“The Deep Blue system is critical for Diamondback’s core operations, which require reliable transportation of nearly 2mn barrels of water per day,” stated Diamondback’s CEO, Kaes Van’t Hof. “Acquiring Five Point’s 70% interest alongside KKR secures this capability for the long term and establishes a strategic partnership that is well positioned for traditional growth with additional opportunities to expand outside of oil and gas through advancements in new technology and potential industrial use cases in the Permian Basin,” he added.

“Deep Blue plays an important role in supporting energy production in the Permian Basin, and we see a compelling opportunity to build on its strong foundation to meet the region’s growing water infrastructure needs,” said a KKR partner, James Cunningham. “We are particularly excited to work with Diamondback, whose longstanding presence in the region make them an ideal strategic partner. We view this investment as an important first step in building a broader relationship and look forward to exploring additional opportunities to invest together in essential infrastructure.”

The deal puts Diamondback and KKR in a “favourable position to benefit from future multiyear contracts to supply cooling water to data centres, along with various other opportunities”, Bloomberg cited a William Blair & Co. analyst, Neal Dingmann, as saying in a note. “Today’s deal also ensures majority ownership of the assets does not end up in another operator’s hands that may not align with Diamondback’s potential growth plans,” he added.

This comes as shale producers increasingly seek out opportunities to take ownership across the full value chain of their operations by buying up supporting infrastructure and the companies that provide it.