If the story of Access Midstream Partners LP were published as a novel, it could be entitled “A Series of Unlikely Events.”

What is today a $12-billion company created from most of Chesapeake Energy’s gathering and processing operations, followed a fairly conventional path: joint venture (JV), initial public offering (IPO), major acquisitions and recapitalization to autonomy and independence. But fueled by growth in unconventional gas development and the needs of its former parent, the firm’s leadership was compelled to run through that course of growth at a breathtaking pace.

Access provides gathering, processing, treating and compression services to producers under long-term, fixedfee contracts. It owns and operates assets across 12 states, with an average throughput of approximately 3.5 billion cubic feet (Bcf) per day and more than 6,000 miles of gathering lines. The core asset base and intrastate pipeline infrastructure is primarily in the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara and Utica shales, as well as conventional and unconventional plays in the Midcontinent regions.

“Most carve-outs or spin-offs go through a major capital event every two or three years,” Mike Stice, chief executive of Access, tells Midstream Business. “Even that is a relatively brisk pace. But we went through our stages at an average rate of about one every six months. Each time the next was proposed, I would give it some study then suggest we could get it done in a year or two. Then we had to do it a lot faster. In each case, the team rose to the occasion, and now we are proud of what we have accomplished. But I don’t know that we would have planned it out this way.”

In late 2009, Chesapeake formed a 50-50 JV with Global Infrastructure Partners (GIP) called Chesapeake Midstream Partners (CMP) that purchased and operated Chesapeake’s Barnett, Permian and Midcontinent gas gathering and treating assets. Just a few months later, in February 2010, CMP filed for a proposed IPO.

‘Unreasonable’ IPO

Stice is an energetic and engaged leader. He is also relatively plain spoken, so it is no contradiction when he follows quickly with the note, “when I was first engaged to take the JV public within a year of its formation, I thought it sounded completely unreasonable.”

Describing himself as “a good soldier,” he turned to the task, and with a small cadre of close colleagues and advisors, was out doing a road show by July 2010.

“It was an interesting trip, because at the time we had no asset base and no inventory. It was all embedded upstream in the parent company,” he says. It was a challenge asking potential backers to bet on the firm in a low-gas-price environment and lingering recession, but not for the last time, Stice and his team were equal to the chore. With the team around him, he rang the opening bell at the New York Stock Exchange in August of that year.

Stice freely offers, “I did not have any experience doing this kind of thing before. I got help from great a staff and great banks.”

The relationships with customers, partners and banks were handled by David Shiels, chief financial officer, and Bob Purgason, chief operating officer. “Bob came out of Crosstex and had the most experience in the master limited partnership [MLP] sector,” says Stice. “It was a very successful IPO, looking back, and we breathed a sigh of relief and figured that we needed about a year to digest.”

No such luck.

The first deal

The first big deal came in December 2010 when CMP agreed to acquire the Springridge gathering system and related facilities in the Haynesville shale from Chesapeake. With the deal, CMP secured a 10-year, 100% fixed-fee gathering agreement that includes a significant acreage dedication, annual fee redetermination and a minimum volume commitment.

At that point, Access almost had a year to digest the acquisition. It was not until December 2011, that CMP took the next big bite, acquiring Appalachia Midstream Services, Chesapeake’s Marcellus shale midstream assets, for $865 million. It was a complex transaction involving Chesapeake’s partners in the play—Anadarko, Mitsui and Statoil.

“So then we were up and running,” Stice recalls. “We started to have a sense that there was no request that we did not think we could do.” He makes a reference to the famous expression of the U.S. Navy Construction Battalion, the Sea Bees, as they built and repaired airstrips on atolls across the Pacific in World War II, often while the battle for control of the islands still raged: “The difficult we do immediately. The impossible takes slightly longer.”

In rallying to that declaration, there is not even a suggestion of hubris in Stice’s voice. Instead he emphasizes the effort, intelligence and heart that his colleagues put into each situation. And, true to form, the next high hurdle was less than half a year away.

“In May 2012, Aubrey [McClendon, co-founder and former chairman and chief executive of Chesapeake] called me and said ‘I need you to sell.’ I said, ‘No problem, what specifically?’ He said, ‘everything.’” Chesapeake was raising cash on many fronts, and divesting its position in Access was part of the program. From a standing start, it took just a month for Stice and his colleagues to arrange a multistage plan with GIP.

First, in June, GIP agreed to acquire all of Chesapeake’s stake in CMP for $2 billion, giving GIP 100% of CMP’s general-partner interest and 69% of its limited partner units. Some of Chesapeake’s midstream operations and some Midcontinent gathering and processing assets also went to CMP in the process.

New name, new ticker

In July 2012, CMP changed its name to Access Midstream Partners, and its ticker symbol changed from CHKM to ACMP. Last December, Access acquired Chesapeake Midstream Operating for $2.2 billion in cash.

The acquisition added gathering and processing assets in the Eagle Ford, Utica and Niobrara liquids-rich plays and expanded Access’ existing position in both the Haynesville and Marcellus dry-gas plays.

At the same time, the last major piece of the puzzle was put in place when Williams agreed to acquire half of Access’ general-partner interest from GIP along with 34.5 million of Access’ subordinated limited-partner units.

“There were plenty of folks who doubted it could all get done,” Stice recalls. “The benefits executives we consulted said everything could not be transferred and arranged in such a short time. But now we are a stand-alone company with two general partners, GIP and Williams, and a very lean operation. We can rely on the history and expertise of Williams, and on the Six-Sigma structure of GIP.

“Dave [Shiels] is ex-GE,” Stice continues. “I knew we had to take some things from the bigger corporations so we did not have to reinvent everything. And in the end, it all came together. I am proud of the team, and I know they are proud of what they were able to accomplish. But I am sure they would all agree we never want to do all that again.”

Tough neighborhoods

For all the celebration over the company’s first tumultuous years, Wall Street and the oil patch are tough neighborhoods with a priority on your next miracle, not your last. Stice says analysts are already critical of Access Midsteam’s over-reliance on a single client.

“This is our one major weakness, according to the financial models,” Stice says with a laugh. “And it is true that 75% of our business comes from one customer. Nevermind that one customer happens to be Chesapeake Energy, one of the top gas producers in the country. It is a position many of our peers in the midstream are envious of, but the ratings agencies think it is a liability.”

Access has made a public commitment to reduce its reliance on Chesapeake to 50% by 2015. Stice did not specify exactly how that reduction would be done, but his new focus on organic growth indicates that he would prefer to let the Chesapeake segment of his business hold steady, even grow as that producer’s business does, but to grow Access’ other clients and volumes even faster. That would serve to ‘shrink’ the Chesapeake share, but only by proportion, not by losing any business.

“We will only do bolt-ons,” says Stice. “When you grow organically, you generally spend at around 6 or 6.5 times EBITDA. In contrast, when you buy assets, you generally pay a multiple of 8 to 12. That means in general, you are giving up some value.”

Building or making bolt-on acquisitions also plays to Access’ operating philosophy of being the largest or second- largest player in each basin where it participates. “That makes us a natural consolidator,” Stice notes, in what remains a highly fragmented sector. “We are in every major unconventional basin except the Bakken.”

Stice explains that it does not make sense to pay a premium to move into a new basin, whether by making a major acquisition or from extensive greenfield construction. “In wholly new production areas, producers tend to do their own gathering, but at some point when the play is proven, they want to monetize that investment and put those dollars back on the drill bit.”

Opportunities abound

There are plenty of those opportunities around these days, so Access is being choosey. “We have to be careful not to overpay,” Stice cautions. “Dave [Shiels] and I have been very disciplined about metrics when we talk with folks about potential acquisitions. We definitely have a walk-away point, and we have used it on more than one occasion.”

He says with a laugh, “that has surprised some people. But our whole operating model is built on discipline. We have to operate within cash flow.”

Outside of any bolt-ons, Shiels tells Midstream Business, “we are going to be spending $3.5 billion through 2013, ’14, and ’15 on organic-growth capital, exclusive of any acquisitions. Of course, some of that will give us the ability to integrate with any bolt-ons but we can’t count on those for our growth.”

On the defensive side of the ledger, Shiels stresses that there is more to fiscal discipline than just operating within cash flow. That flow must be sound.

“We have no direct commodity exposure in our contract structure,” he notes. “We are protected against volume risk with minimum-volume terms. We are protected from capital risk with fee redetermination terms. And we are protected from commodity risk with long-term, 10- to 20- year structures.”

In an echo of the criticism leveled against Access’s overreliance on Chesapeake as its largest client, Shiels says the contract terms outlined are sometimes criticized as a sweetheart deal from a former parent company. He dismisses such suggestions and turns the point back on those who would cast the first stone.

“Those are market terms,” he says emphatically. He notes that such terms are not uncommon in contracts around the industry, and suggests that other service providers are welcome to negotiate the same language in their transactions. The real difference, he surmises is that “these terms provide mid-teens returns. We tell our customers, and we explain to the financial community that we will take mid-teens if that will give us certainty. We call that a win-win. I think many of our midstream peers want something more like a 20% or 30% return.”

‘Execution culture’

For a company that has developed a reputation for business acumen in its short life, the other component of the Access operating philosophy is not some rapacious eye. Rather it is almost quaint: “We spend a lot of time making sure that wells get connected on time,” says Stice. He explains that a focus on execution gets everyone thinking in terms of safety and reliability with the company and builds solid relationships with the producers who are customers.

“We have an execution culture,” Stice says. “I have personal responsibility for the company, but we foster that same feeling of personal responsibility from everyone in the organization.”

The next logical step out from that is partnership and then JVs. “We embrace all those business arrangements,” says Stice. “People often look at deals just in terms of what is good for them. We have found that often a partnership or a joint venture is what is best for both companies.” What form an arrangement might take varies with the size and scope of the operation, the basin and the competitive market for both producer and processor, Stice notes.

The variables, Stice elaborates, include such temporal factors as where the wells and the field and the play are in their production lives as well as what infrastructure and service facility already exists.

“Is it the fifth well or the 50th or 500th? Who else is available to provide service?” he says. And he means that not only in a competitive sense, given Access’ preference for partnerships and joint ventures. It is something of an oversimplification, but the equation often comes down to whether risk is high or low and whether production is high or low.

That said, Access is willing to venture into new plays, with proper precautions. “We are a service company, and we are very attuned to the cost of that service. We will spend money to enter a new area, but we have got to be protected by the producers,” he says.

Comments