Key Points
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Building energy infrastructure is costly and time-consuming.
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Midstream businesses don't undertake capital investment projects lightly.
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The Solitude Pipeline System has gotten the green light. You probably haven't heard of it, but the project will help connect natural gas production in the Permian Basin to demand on the Gulf Coast. Given the current global demand for natural gas, this could be a valuable capital investment project.
But what's most interesting here is that the Solitude Pipeline System is being backed by companies that are actually rivals, including pipeline owners MPLX LP (NYSE: MPLX) and Western Midstream Partners (NYSE: WES), and upstream producers Diamondback Energy (NASDAQ: FANG) and Devon Energy (NYSE: DVN). Here's why these competitors are teaming up.
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Pipeline projects are big deals
Building a new pipeline can cost hundreds of millions of dollars and often more. They take years to develop. For example, the Solitude Pipeline, which received the go-ahead in mid-August of 2026, won't start transporting any product until the second half of 2029 if everything goes as planned. And that's just the first phase of the capital investment project, with a second phase expected to be completed in 2030. While cost figures haven't been provided, the key is that no revenue will be produced until gas is moving through the pipeline.
Step back and consider that fact for a second. There is a huge up-front cost and no revenue until the project is finished. That's a big burden for a company to take on. It helps greatly if you can share that burden, even if it means partnering with your competitors. That's basically what is going on with MPLX LP and Western Midstream Partners. MPLX LP will own 10% of the pipeline, with Western Midstream owning 7.5%. A private energy infrastructure company, Whitewater, owns 50%. So MPLX LP and Western Midstream Partners are actually teaming up with a third midstream competitor.
Helping to ensure there's demand
That's 67.5% of the project accounted for. What about the rest? Well, that's where Diamondback Energy and Devon Energy, two rivals in the upstream production side of the energy sector, come in. Upstream companies use pipelines to get their products to market, and helping fund projects ensures they have access to pipelines to support production growth. Devon Energy will own 25% of the pipeline, with Diamondback Energy at 7.5%, rounding out the final 32.5%.
All in all, this is good news for all the companies involved. And spreading the financial burden will help to ensure the project is a success. Deals like this often go unnoticed, showing up as a simple line item in a midstream operator's capital investment plans. But the group dynamic here is often how business gets done in the energy sector.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.