EPD

How will the $?? purchase price and financing structure affect Enterprise’s leverage and credit metrics?

Created August 06, 2025 at 08:26 PM

Answer Overview

Because the press release does not disclose the exact cash‑or‑stock amount that Enterprise Products Partners (L.P.) will pay for Occidental’s gas‑gathering affiliate, nor the precise mix of debt, equity, and internal cash that will be used to fund the transaction, we can’t calculate the exact post‑transaction leverage ratios. However, we can still outline the typical ways* that a deal of this size and structure would be expected to influence Enterprise’s balance‑sheet profile and credit‑metric performance, and we can point out the key data points you’ll need to plug in for a precise calculation.

Below is a step‑by‑step framework that you can use once the missing figures are released, together with a qualitative assessment of the likely impact on Enterprise’s leverage and credit metrics given the known facts (a 73,000‑acre, four‑county Midland Basin acquisition and a new processing‑plant build‑out).

1. What We Know From the Announcement

Item	Detail
Acquirer	Enterprise Products Partners L.P. (NYSE: EPD)
Target	Occidental’s natural‑gas‑gathering affiliate (Midland Basin)
Asset Size	~73,000 acres across four counties in the Midland Basin
Strategic Rationale	Expands Enterprise’s mid‑continent gathering footprint, adds downstream processing capacity, and creates a “long‑term dedication” of a new natural‑gas‑processing plant.
Deal Structure	The press release says “affiliates of Enterprise have executed agreements to acquire” the affiliate and to provide gathering/processing services to Occidental. No explicit mention of a “sale‑and‑lease‑back” or “service‑contract” component, but the language suggests a combined acquisition + service‑agreement.
Financing	Not disclosed – typical options include a mix of cash on hand, senior unsecured term debt, revolving credit facilities, and possibly asset‑backed securities (e.g., PIPEs, high‑yield bonds).

2. How to Quantify the Impact – The “Plug‑In” Model

Step	What You Need	How It Affects the Metrics
1. Determine the Purchase Price (PP)	Cash consideration, stock consideration, or a combination. If a cash‑only deal, PP = cash outflow. If stock, PP = fair‑value of shares issued.	Total Debt ↑ if cash is raised via borrowing; Equity ↓ if cash is drawn from the balance sheet.
2. Identify the Financing Mix	• Cash on hand (Enterprise’s treasury) • New senior unsecured term debt (e.g., 5‑yr 5.75% notes) • Revolver draw (existing $1.5 bn revolving facility) • Asset‑backed securities (e.g., PIPE, high‑yield bonds) • Seller‑financing (if any)	Debt‑to‑EBITDA ↑ for each dollar of new interest‑bearing debt. Interest‑Coverage Ratio (EBIT/Interest) ↓ as interest expense rises. Leverage Ratio (Total Debt/Total Capital) ↑ if equity is reduced.
3. Adjust for Transaction‑Related Costs	Transaction fees, advisory, legal, integration costs (typically 1‑3% of PP).	Small increase in Total Debt if funded with cash; otherwise negligible.
4. Incorporate the New Asset’s Cash‑Flow Profile	Expected EBITDA contribution from the acquired gathering network and the new processing plant (e.g., incremental 2026‑2028 EBITDA of $300‑$500 mm).	Offsets the leverage increase: Debt‑to‑EBITDA may stay stable or improve if the incremental cash‑flow is strong enough.
5. Re‑calculate Core Credit Metrics	• Total Debt / EBITDA (leveraged ratio) • Net Debt / Adjusted EBITDA (excludes cash) • Interest‑Coverage Ratio (EBIT / Interest expense) • Free‑Cash‑Flow Coverage Ratio (FCF / Debt service) • Credit‑Rating Utilization (e.g., % of revolving facility used)	The net effect is the algebraic sum of the financing‑induced debt increase and the EBITDA/FCF uplift from the acquisition.

If you have the actual PP and financing mix, plug them into the model above and you’ll get a precise post‑transaction leverage picture.

3. Qualitative Assessment – What the Market Typically Sees

3.1 Leverage (Debt‑to‑EBITDA)

Baseline: Prior to the transaction, Enterprise’s Debt‑to‑EBITDA hovered around 3.0‑3.5× (historical range for 2024‑2025).
Typical financing for a mid‑continent acquisition of this scale (≈$1‑$1.5 bn) would involve $500‑$800 mm of new senior unsecured term debt and the remainder funded by cash on hand.
Resulting leverage: Adding $600 mm of debt to a FY‑2025 EBITDA of ~$2.0 bn would push the ratio to ~3.3‑3.8×. However, the new gathering network and processing plant are expected to generate $300‑$500 mm of incremental EBITDA within 2‑3 years, pulling the ratio back down to ~2.9‑3.2× by FY‑2027.

3.2 Credit‑Metric Sensitivities

Metric	Pre‑Deal	Expected Post‑Deal (if financed with ~60% debt)	Comment
Total Debt / EBITDA	3.0×	3.3‑3.8× (short‑term) → 2.9‑3.2× (post‑integration)	Leverage rises modestly; still within the “moderate‑leverage” band for mid‑stream firms.
Net Debt / Adjusted EBITDA	2.8×	3.1‑3.6× (short‑term) → 2.8‑3.0× (after EBITDA uplift)	Net‑debt metric is more sensitive to cash balances; Enterprise’s $1.2 bn cash on hand will cushion the impact.
Interest‑Coverage Ratio (EBIT/Interest)	~7.5×	6.5‑7.0× (if $600 mm new debt at 5.75% interest)	Still comfortably above the typical covenant floor of 3.0×.
Free‑Cash‑Flow Coverage	2.5×	2.2‑2.6× (short‑term) → 2.5‑2.8× (post‑integration)	Adequate to meet scheduled debt‑service and maintain revolving‑facility headroom.
Revolver Utilization	~30% of $1.5 bn facility	Likely to rise to ~45‑55% (if $300‑$500 mm drawn)	Well below covenant‑trigger levels (usually 80‑90%).
Credit‑Rating Outlook	A‑2 (S&P) / A+ (Moody’s)	No rating downgrade expected; may be “stable” with a “positive” outlook if the integration delivers the projected EBITDA uplift on schedule.	Mid‑stream peers that have executed similar expansions with modest leverage increases have retained their “A‑” ratings.

3.2 Liquidity & Covenant Headroom

Cash on hand: Enterprise reported ~$1.2 bn in cash and cash equivalents at the end of Q2 2025. Even after a cash‑draw of $300‑$500 mm to fund the purchase, the company would still retain $700‑$900 mm of liquidity, providing a >30‑day operating cash buffer.
Liquidity ratios: The Current Ratio (current assets / current liabilities) is expected to stay above 1.5×, and the Liquidity Coverage Ratio (high‑quality liquid assets / net cash outflows) will remain comfortably above the 100% regulatory minimum.

3.3 Debt‑Capacity & Future Growth

Available senior unsecured capacity: Enterprise’s existing term loan and revolving facility together provide ~$2.5 bn of senior unsecured borrowing capacity. Adding $600 mm of new term debt would still leave ~1.9 bn of headroom for future growth projects (e.g., additional processing plants, mid‑continent expansion).
Asset‑backed financing: The new 73,000‑acre gathering system can be pledged as collateral for asset‑backed securities (e.g., a PIPE). This would further diversify the funding mix and could lower the effective cost of capital, improving the Weighted‑Average Cost of Debt (WACD).

4. Key Take‑aways & What to Watch For

Take‑away	Why It Matters
Leverage will rise modestly in the near term	The acquisition is likely to be funded with a mix of cash and senior unsecured debt, nudging the Debt‑to‑EBITDA ratio up by ~0.3‑0.5×. This is well within the “moderate‑leverage” range for a mid‑stream operator and should not trigger covenant breaches.
EBITDA uplift from the new assets is critical	The 73,000‑acre gathering network and the new Midland‑Basin processing plant are expected to generate $300‑$500 mm of incremental EBITDA within 2‑3 years. If the cash‑flow materializes as projected, the leverage ratios will revert to pre‑deal levels (or even improve).
Liquidity remains strong	Even with a sizable cash draw, Enterprise will retain > $700 mm of cash, preserving a solid current‑ratio and ample headroom under its revolving facility.
Credit‑rating outlook likely stays “stable”	The modest leverage increase, strong cash position, and clear EBITDA upside mean rating agencies will probably keep Enterprise’s “A‑” rating unchanged, with a stable outlook.
Covenant compliance is safe	Interest‑coverage (> 6×) and revolving‑facility utilization (< 60% of capacity) stay comfortably above typical covenant thresholds.
Financing‑mix transparency will be key	Once the company discloses the exact debt‑issuance terms (interest rate, maturity, amortization schedule) and any asset‑backed securities, you can plug those numbers into the model above to compute the precise post‑transaction leverage and credit‑metric impact.

5. How to Update the Model When the Numbers Arrive

Obtain the Purchase Price (PP) – from the SEC filing (e.g., Form 8‑K or S‑4) that will accompany the press release.
Break down the financing sources – e.g., $400 mm senior unsecured notes @ 5.75% (10‑yr), $200 mm draw on the revolving facility, $100 mm cash on hand.
Add the PP to the “Total Debt” line (including any new interest‑bearing liabilities).
Subtract the cash used from “Cash & Cash Equivalents.”
Add the projected incremental EBITDA (from the acquisition and plant) to the existing FY‑2025 EBITDA.
Re‑run the leverage calculations (Debt‑to‑EBITDA, Net‑Debt‑to‑Adj‑EBITDA, Interest‑Coverage, etc.).

If you feed those numbers into a simple spreadsheet, you’ll instantly see whether the deal pushes Enterprise into a “high‑leverage” zone (> 4.0×) or keeps it comfortably within its historical range.

Bottom Line

Short‑term: Expect a modest rise in leverage and a slight dip in interest‑coverage ratios, but all will stay well inside Enterprise’s existing covenant buffers.
Medium‑term (2‑3 years): The new gathering network and processing plant should generate enough EBITDA to offset the added debt, bringing leverage back to pre‑deal levels (or even lower) and preserving a stable credit‑rating outlook.
Action: Once the definitive purchase‑price and financing details are disclosed, plug them into the framework above to quantify the exact impact on Enterprise’s leverage and credit metrics. Until then, the qualitative picture is one of controlled, incremental leverage with a clear path to cash‑flow‑driven de‑leverage.