Capital may never have been cheaper or easier to find. That’s the good news for midstream executives focused on growth prospects for an expanding and changing energy sector.

But wait a minute: Oil prices—although up from recent lows—still hover on the low end of the scale and brimming storage threatens to pitch those prices over the cliff again. Also, lower volumes threaten fee-based revenue streams in plays where drilling has dropped.

What to do?

Midstream Business invited four CFOs to share their thoughts on one important question that their organizations—and others—face right now: How does a midstream operator manage enterprise risks in this environment?

Here are their observations.

Discipline, Patience

David Merrill has a unique perspective on the oil and gas business as senior vice president, CFO and treasurer of Unit Corp. The Tulsa, Okla.-based firm has sizeable operations in three areas of the energy business.

Its midstream Superior Pipeline Co. provides gathering, processing and transportation in Oklahoma, Texas, Pennsylvania and West Virginia. Upstream, Unit Petroleum Co. is an oil and gas producer in the Midcontinent and onshore on the upper Texas Gulf Coast. Meanwhile, Unit Drilling Co. is one of the largest onshore drilling companies in the U.S. with 94 rigs in the Anadarko and Arkoma basins, in the Rockies and on the Gulf Coast.

Oil prices are volatile but appear to be staying in a range of the low- to mid-$50s per barrel. The price doesn’t seem to be changing and the futures price isn’t much different. So that’s what you have to work with.

And cheap money: All forms of capital are relatively cheap, but the private-equity (PE) money is out there in a major way. That creates an interesting slant on things as well.

The key—as you ask—is how do you manage enterprise risk in this environment?

Well, the key for us is we have been around for 50-plus years. We’re not a company that was started to build and flip, like many organizations are. That’s certainly the case with a lot of midstream companies as well as upstream companies too. The key for us is to do what we have always done. We stay disciplined and patient. Whether the commodity environment is anemic or whether it’s frothy and moving up and to the right, we employ the same risk practices. That is to stay disciplined and patient.

Most companies have a process they follow to evaluate acquisition opportunities and growth opportunities. Just because there’s a lot of capital availability, that there’s a lot of private-equity capital out there, doesn’t mean you have to modify—or should modify—your risk-assessment approach too much. So we have to be flexible, but we need to stay disciplined.

A different view

Even some of these PE firms that have a lot of money to put to work are having to look at things a little differently in this environment. In some cases, leverage isn't as available to them as much as it had been in the past.

So they’re having to use more of their equity instead of bringing in debt to lever it up, which certainly changes how they look at certain deals or what deals they’re able to pursue. That environment has opened up some opportunities for us to be able to consider that weren’t necessarily available to us before.

As we’re looking at things, as we’re evaluating growth opportunities—acquisitions or organic—our focus is on economics and returns. That’s how we stay disciplined in this environment.

We think the future is bright for the industry. Clearly, what happens with the commodity price is going to dictate the pace of activity for everybody out there. Assuming commodities are in the right ZIP code or [prices are] improving—which a lot of people appear to think will happen as supply is getting a little tighter on a worldwide basis—new opportunities should play out well. There seems to be an improving environment for NGL, which have a significant amount of upside for the midstream business, or plays that have a good-sized liquids component.

Yes, we think the future is bright, but the key—going back to what I said initially—is just remaining disciplined and patient, not getting too far ahead of your skis on things.

I think I said “disciplined and patient” numerous times. But if you have been around the industry long enough, you know that that is how you survive. We have certainly seen a number of names that were probably more aggressive and utilized debt more than they maybe should have. It is not always up and to the right; this is a very cyclical business. When things change, if you’re not prepared for it, it can have an unhappy ending.

Vet The Risk

A comparatively small but growing privately held player in the sector, Howard Energy Partners, has big plans. It has established an important niche in South Texas’ Eagle Ford and now looks to link its gathering and processing system there to promising markets in Mexico and the Texas Gulf Coast. Its Nueva Era system is scheduled to start moving Texas gas south from the Agua Dulce hub to Monterrey, Mexico, in this quarter. The ambitious development won recognition as Project of the Year in the second annual Midstream Business Excellence Awards.

Meanwhile, Howard’s proposed Dos Águilas Pipeline will move petroleum products from the Corpus Christi, Texas, refining hub to Mexico, with construction scheduled to start in 2018.

Scott Archer, senior vice president and CFO, shared his thoughts on financing that growth program in today’s market.

We’re in a relatively low commodity-price environment, but there’s capital available, so how do balance the two to grow? To me, it’s pretty fundamental in that you always should rely on your basic approach to evaluating opportunities, which for us is forecasting the project based on a reasonable set of assumptions and determining whether it can generate sufficient risk-adjusted returns on your capital.

In this type of a commodity environment, what that means is the cash flows may be reduced if you have a direct tie to commodity prices or even indirectly, due to less drilling activity. In other words, the cash-flow projections may be lower than they would be in the more robust environment.

When there is excess capital trying to come into the market, in theory that should help lower the cost of capital. However, regardless of the cost of capital, we try to stick to reasonably consistent return requirements.

By doing that, you avoid falling into the trap of saying, “I’ve got access to a lot of potentially inexpensive capital, then I should be aggressive on a bunch of projects and do things that I might not otherwise do.” We stick to fundamentals around hurdle rates and assessing risk appropriately and evaluate projects on that basis.

Cross-border risks
For our Mexican projects, the way we think about them is: There are a lot of things that we’re familiar with that would be akin to U.S. projects. We have good, strong offtakers, good contracts supporting the business, etc. —the difference being, with the cross-border nature, that there are different risks that we might not deal with on a U.S.-based project. As we think about how to structure and finance a Mexican project, we’re considering those unique risks.

It all goes back to the fact that you should assess each project individually. You have to identify and be cognitive of the risks, thoroughly vet those risks and try as best as possible to mitigate them or account for them in your analysis.

Despite the commodity-price environment, there are a lot of good opportunities in the market right now and we continue to look at several things, including organic projects, acquisitions and expansions of our current assets. We continue to try and find those opportunities in the market and do things that benefit Howard Energy Partners.

Deliberate Growth

Barely two years old, Brazos Midstream Holdings LLC is a new player that landed at the right place at the right time: the Permian’s booming Delaware Basin. CFO William Butler has guided the financial side of the startup, which has a gas plant in operation handling 60 million cubic feet per day (MMcf/d). Work is underway on a 200 MMcf/d plant scheduled to go onstream in 2018.

Brazos also operates two crude oil terminals and nearly 200 miles of gathering lines. It’s a story of rapid but careful growth as the Fort Worth, Texas-based firm joins other midstream players in the Delaware to respond to the basin’s quickening pace.

For a startup business, access to capital is paramount, and it’s always better to have too much liquidity than not enough. Having the right partnerships is also very important.

Brazos has been very deliberate with the partners we’ve chosen—beginning with the founders. Our executives each bring different experiences to the table—from E&P to midstream business development to project management—which is beneficial when we are looking at potential growth opportunities. Our complementary backgrounds help direct us to agreement on the right types of future projects.

That goes also for our private-equity backer, Old Ironsides Energy. They have access to a large pool of capital and have been an extraordinarily supportive partner. They have given us the freedom to be independent in the projects that we identify and how we execute our strategy. We also have a growing revolving credit facility with a group of strong, hand-picked commercial banks.

We view our producer customers as partners. We have spent a lot of time with each producer to earn their business and negotiate long-term dedications. That meant that, in order to deliver the fixed processing recoveries we promised our customers, we had to expand our system in phases, but with the confidence that we had the contracts to support each expansion.

We now have a large, growing customer base in the basin and communicate regularly regarding development plans so that we continue to distinguish ourselves in a very competitive landscape.

When we formed Brazos in 2015, we didn’t think we were necessarily early in the southern Delaware Basin—but, in the last two years, a lot has changed in the region. We did our homework up front on the geology, well economics, incumbent midstream infrastructure and surrounding producers. At the time, this was an area with a lot less well control in the horizontal Wolfcamp and commodity prices were far weaker than even today.

So we started small intentionally. We were targeting greenfield opportunities where we could really control the spending on a project and we didn’t want to feel compelled to immediately deploy a lot of upfront capital without the underlying contractual commitments. We had to be confident there was enough volume and lack of existing infrastructure to justify the capital need and where the well economics were going to hold up, even in a “lower for longer” commodity environment. This area turned out to be the epicenter, as it were, of the southern Delaware Basin.

Lowering risks

Recently, you’ve seen a lot of public companies purchase private producers in the Permian. This has created challenges for midstream companies in the region, including production delays as the larger, public companies reset their drilling schedules. We believe that’s a long-term positive for us because now those assets are in the hands of producers who have better access to capital. With these changes, we see lower risk across our asset base, which is why we announced a second gas processing plant, bringing our total operated processing capacity to 260 MMcf/d by early 2018.

Going forward, a key risk we face is to stay ahead of our producers’ volume trajectories, so planning for construction of our third processing plant is already underway.

Overall, we have been very deliberate in how we do things. We have not taken much speculative risk and are fortunate to be in an active region where larger, public producers continue to dedicate drilling capital with strong well economics even in a lower commodity environment. We have formed the right partnerships since Day One and have ample liquidity to continue to expand our platform going forward.

‘Be Prepared’

Michael J. Garberding is president and CFO of EnLink Midstream LLC, which ranked No. 17 in Midstream Business’ annual Midstream 50 list. EnLink was formed in 2014 from the merger of Crosstex Energy Inc. with substantially all of Devon Energy Corp.’s midstream assets. A career of more than 25 years has given Garberding a long-term perspective on how to manage—and succeed in—the energy business.

I see your question in three parts—anemic commodity prices, managing enterprise risk of the organization, and cheap money.

Those of us who have been in the industry a long time understand the volatility of commodity prices and that this industry is very cyclical. A few years ago, I was in Midland [Texas] and I met a lot of young professionals who were just getting into the industry and had only seen $100 crude. They had not yet seen the up-and-down cycles of our market.

Yes, there are good times, but there are also hard times in these cycles. The key to success is creating a business that survives and thrives during all cycles. You don’t know exactly when they are going to occur, but you know they will happen, and it’s important to be prepared.

Four strategies

“Surviving and thriving” gets to the next part of the question: managing the enterprise risk of the organization. You have got to create an organization that is built to last. At EnLink, we see four key strategies around which we’ve structured our company and long-term strategic plan: a strong balance sheet, location in the right places, customer focus and best-in-basin services.

Those four things really work hand in hand in how we think about enterprise risk management of the business and being able to succeed through the commodity cycles we are going to see.

A strong balance sheet is critical for successful execution. At EnLink, this is really about having an investment-grade balance sheet, which gives us the capability to access capital whenever needed. That access to capital and the associated support of investors are key to our strategy and our growth plan. It’s important we plan for the worst. And when the best comes around, it gives us nothing but great opportunities.

Location in the right places is the next strategy. EnLink has spent the last three years repositioning our business to ensure we are in the right places. We analyze what happens with rigs over all cycles down to a county level. Where were rigs in the high times and where do you see stability in rigs during the low part of the cycle?

That’s where EnLink has positioned our operations. We were extremely focused when creating EnLink after the 2014 merger with Devon Energy in understanding and being intentional about being in the right places or basins. Look at our footprint in the Stack and Cana-Woodford in Oklahoma, our two footprints in the Permian in the Midland and Delaware basins, and our extensive footprint in Louisiana. You will see that, both from a production and demand-center standpoint, we believe we’re clearly in the right places.

Balance-sheet capability

We secured and grew a lot of our footprint during the downturn of commodity prices, which, in our view, was a great time to reposition the company. Plus, we had the balance sheet and capability to do that.

Next, customer focus: That's an important strategy that you cannot lose sight of. You want the right mix of customers, which can be different for each of your operating areas. EnLink is lucky enough to have a great sponsor in Devon that really helped us reposition the company, specifically in Oklahoma. We also have a long list of key customers focused in each of our growth areas.

Lastly—and this is really “the price to play,” as I call it—is best-in-basin services. Midstream is an incredibly competitive space. Having the right locations and right customers is important, but if you don’t have the capability to provide high customer service at low costs, you cannot effectively compete or execute with excellence. So much of that is dependent on the people and teams executing on the plan. They are the interface to the customer—the ones executing on the projects we need to meet customers’ needs.

EnLink proved our commitment to best-in-basin services in the first quarter of 2017. We had three large-scale projects come online: the new “Greater Chickadee” crude oil gathering system in the Midland Basin; Chisholm, a large 200 MMcf/d processing facility in Central Oklahoma; and the Ascension NGL Pipeline, a joint venture with Marathon Petroleum that continues to strengthen our Louisiana value chain. Execution of projects like these to meet customer needs is incredibly important.

Finally, you asked about the flood of cheap money. We think that, as long as it’s available to us and funding us, we feel great about it. It is adding players to the competition, which is why differentiating your midstream company is critical.

At EnLink, we differentiate ourselves in four main ways. It’s our investment-grade balance sheet, our full slate of the services our customers need, our overall customer focus and our teams who execute these plans with excellence.

But at the end of the day, it all boils down to one of the key tenets of our company: the people. They tie all of these strategies together. We have been in this business a long time with the legacy of Crosstex Energy and then, EnLink. We love what we do, we love to compete, and we continually prove that we do an excellent job of that.

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