Houston-based Apache Corp. and Kayne Anderson Acquisition Corp. (KAAC) late Wednesday agreed to form a pure-play Permian Basin midstream operator to hold substantially all of Apache’s gathering, processing and transportation assets in the No. 1 prospect Alpine High.

Altus Midstream LP would be jointly owned and structured as a C-corporation anchored by Apache’s West Texas assets in the Delaware sub-basin. Altus also would hold options to gain equity participation in five natural gas, natural gas liquids (NGL) and crude oil pipeline projects under construction or proposed that would traverse the Permian to various points on the Texas coast.

“The transaction with Kayne Anderson Acquisition Corp. creates a premier midstream enterprise to service Alpine High, an enormous, highly economic upstream resource base in the Permian Basin, the most active oil and gas region in the world,” said Apache CEO John Christmann IV. Alpine High, he noted, contains more than 5,000 feet of vertical hydrocarbon bearing formations across close to 340,000 contiguous net acres.

Christmann said earlier this year midstream infrastructure buildout would determine the near-term success of the play, which Apache discovered in 2016.

“Since our discovery of Alpine High, we have invested nearly $1 billion in an extensive network of fit-for-purpose infrastructure to meet the current and future processing and transport needs of the play.”

Apache initially would own 71% of Altus Midstream and could increase its stakes to 74% based on performance earnouts.

Altus, set to launch by the end of the year with KAAC shareholder approval, would begin with a deep cupboard of opportunities, including rich gas processing plants with inlet capacity of 380 MMcf/d, lean gas treating and compression plants with inlet capacity of 400 MMcf/d, 123 miles of gathering pipelines and 55 miles of processed gas pipelines with three market connections.

By the end of 2020, Altus expects to add another 1 Bcf/d of cryogenic, rich gas processing. The midstream operator also would hold options to purchase 15-50% equity in these planned Permian gas, crude and NGL pipelines:

Apache management from almost the start of developing Alpine High said it was not opposed to either monetizing the midstream business or bringing in a partner to help finance the massive outlay needed to build infrastructure. Gas volumes are escalating quickly, with a nearly 70% increase year/year in output during the second quarter.

The transaction joint venture “facilitates the allocation of Apache’s capital to the development of the vast Alpine High upstream resource base,” Christmann said. “In turn, focused capital development in the upstream should bring significant growth to Altus Midstream for many years to come.”

KAAC Chairman Kevin McCarthy said Altus “fits all the criteria” the board outlined to become a midstream operator when the company was launched. Once the deal is completed, KAAC would change its name to Altus Midstream Co. and be publicly traded.

“We believe investors will appreciate the clear alignment of interests between Altus Midstream and Apache,” McCarthy said. “Altus Midstream does not have incentive distribution rights and is well positioned to execute on its growth plans.”

Apache’s Brian Freed, senior vice president of midstream and marketing, was named Altus CEO.

“We have a strong growth platform at Alpine High with a large, contiguous acreage dedication in a proven play, infrastructure in-place to accommodate a significant ramp in volume, and options for equity participation in five planned pipelines that will provide connectivity from the Permian Basin to the Texas Gulf Coast,” Freed said.

Altus should have more than $900 million of cash with no debt at closing and is projected to be free cash flow positive by 2021.

“We see great opportunities to expand our asset base in Alpine High, in surrounding areas of the Delaware Basin, and elsewhere in the Permian Basin,” Freed said. “We will have the financial capacity to expand our footprint both in terms of our physical asset base as well as the ability to access volumes from third-party operators outside of Alpine High.”

Altus is expected have an estimated market capitalization of $3.5 billion at formation, now expected in 4Q2018, assuming 354.4 million common shares outstanding at $10/share. KAAC is contributing $952 million, including $380 million in proceeds raised through an initial public offering and $572 million raised in privately placed shares.

Net transaction expenses, the proceeds would be used to fund ongoing midstream investments.

Apache would have the right to earn an additional 37.5 million shares if certain share price and operational thresholds are met over the next five years.

With a planned effective date of Oct. 1, the transaction would fund Apache’s projected 4Q2018 Alpine High midstream capital spend of about $170 million. Upon closing, Apache agreed to provide Altus with construction, operations and maintenance services.

Apache’s financial advisers were Barclays Capital Inc. and Tudor, Pickering, Holt & Co. while Bracewell LLP acted as legal adviser. For KAAC, Citigroup acted as financial adviser and Latham & Watkins LLP acted as legal adviser.