Finding a Niche: Midstream Giants Target Private G&P Assets

Private midstream companies are concentrated in the gathering and processing (G&P) sector of the business, which makes that segment especially attractive for acquisition to public companies. According to East Daley Analytics (EDA), the gathering and processing (G&P) sector accounts for almost half the revenue of a shipped barrel of NGL. By taking over a G&P system and connecting it to its network, a major midstream company can essentially double its earnings.

Public companies spent about $13.5 billion on acquisitions in private G&P networks from 2022 to 2024, according to EDA. The majority of those deals, about $11.2 billion worth, took place in the Permian Basin, the nation’s largest producing shale play. EDA data over the last two years show the multiples offered by Permian acquisitions averaged 7.29, while other basins offered an average multiple of 6.3.

“These systems are not just in an attractive basin, but they are competing very well within that basin,” said Ajay Bakshani, director of midstream equity at East Daley. “All of the Permian G&P deals had expansions ongoing during the time of acquisition.”

The last large acquisition in the Permian, Energy Transfer’s merger with WTG Midstream in May 2024, marked a turning point in the basin with the $3.1 billion acquisition of the last, large private G&P network in the basin. WTG’s facilities, which touched 25 counties in West Texas, included more than 1 Bcf/d of natural gas processing capacity and had more than 10 rigs operating in the system.

On its own, WTG’s system was the seventh-largest G&P network in the basin. With the acquisition of WTG, 82% of the Permian’s processing capacity is now owned by eight public midstream companies, according to EDA. Of the remaining midstream G&P networks, 10% is made up of small public and government systems, small private companies with little activity, or small systems owned by E&Ps. The remaining 8% of market share is split among five private companies: Brazos Midstream, Vaquero Midstream, Stakeholder Midstream, Salt Creek Midstream and Canes Midstream.  

While the pool of remaining private targets continues to shrink, Canes CEO and Co-Founder Scott Brown said the basin still has room to grow.

“It’s the best rock in the country, and they continue to find more benches to drill in more economical wells than anywhere else in the U.S.,” Brown said.

Canes, formed in 2019, operates a G&P system made up primarily of natural gas facilities, with some crude lines in the eastern Midland Basin. The company gained a foothold by offering producers a financial advantage to buy into the system.

“Generally, that’s the way to get your foot in the door and start building a grassroots system, is having some kind of niche,” Brown said. “For us, when we started building our system, we gave our producers take-in-kind rights for NGLs and residue.”

Take-in-kind rights allow producers to market a product themselves instead of depending on the midstream network’s downstream contracts.

“As a small private equity startup, you have to be able to customize your agreements with the producers,” Brown said. Canes will handle about 600 MMcf/d of natural gas by year-end 2024.

Local guide

Outside of the Permian, private company Elevation Midstream has been able to differentiate itself to E&Ps by taking on the challenges that the Colorado regulatory regime presents. Plays in this region often are in populated areas and governed by Colorado’s state regulators, which API calls “the strictest in the world.”

The company operates gas, crude and water lines in the Denver-Julesburg (D-J) Basin, and far from being put off, Elevation CEO John Roberts believes companies willing to take on those challenges can find plenty of prospects.

“One of the reasons that we like the D-J is because of the specific complexities from being in Colorado,” Roberts said. “There’s a perceived overhang due to the complexities of permitting and some of the hurdles of operating here. That tends to keep a lid on competition, which is good for us.”

In Colorado, Roberts said, every township and county has its own set of rules, not to mention the state’s rigorous legal framework and the occasional hostile politician. The legislature considered a bill in the spring to cease issuing new oil and gas drilling permits by 2030. (The proposal was shot down in committee.)

“Producers, because they have to jump through the same hoops, really know how valuable it is to partner with a midstream operator who understands the complex state, local permitting and all the regulatory regimes and how people can work through all that to get pipe built and their wells connected,” Roberts said.

“There’s an opportunity here to build a valuable business by targeting a niche spot in the market, both geographically and in terms of where we are in the value chain and doing the hard things well in that niche,” he said.

Elevation’s operations include crude stabilization capacity of 50,000 bbl/d and 120 MMcf/d of natural gas compression. In July, the company made an acquisition of its own, merging with Platte River Holdings, a subsidiary of ARB Midstream. The Platte River assets added more than 200 miles of crude gathering and transmission pipelines to Elevation’s network.

The merger was an indication that the market forces driving consolidation among the larger public companies are at work at the private level as well. The D-J Basin is largely built out, Roberts said, and all companies are looking at other networks for growth opportunities.

“I don’t think we’re seeing the level of upstream growth in the D-J or anywhere that you used to see,” he said. “Those large system buildouts, the large capex spends—that phase is over.”

Many senior executives seem to be taking the same approach, exploiting their agility to become experts in an area with a service deficit in preparation for expansion when the right time comes. But not every company is on the bandwagon.

Tallgrass Energy Partners, a public company that went private in 2020, is the exception to the rule with its all-purpose business model. The company operates more than 10,000 miles of energy infrastructure assets across the U.S.

After the sell

Travis Roby, CEO of Bayou Midstream, which operated out of the Bakken Shale in North Dakota and Montana, said his company’s participation in the latest round of midstream M&A is complete as of May with the sale of assets to fellow private company Bridger Pipeline.

Bayou started out in 2018 with 10,000 dedicated acres of crude gathering service for one producer. By 2024, the company had branched out to 90,000 acres and an average flow of 80,000 bbl/d of crude. Bayou’s operations even included a sand terminal, which Roby said was a first for him.

“We view ourselves as a midstream company, as a customer service provider for producers,” Roby said. “So, we find—or the producers identify—needs they have, and we go solve those needs, or we plug those holes where they have them.”

When it came time to sell Bayou’s assets, Roby said there was no crystal ball or formula that enabled the companies to decide on the right time.

Bayou had expanded with a merger in 2022, purchasing Northstar Acids. The commercialization of the new assets had gone well, and the company began to receive unsolicited inbounds on its network as the Bakken continued to develop.

“We were in our fifth year,” Roby said. “It just seemed like a really good time. It also felt like the window for acquisition was open. Sometimes if feels like there are windows when acquisitions are actually taking place, and there are times when they’re not.”

The company’s crew was either hired full-time by Bridger or kept on as contract workers after the merger. According to Roby, Bayou will probably no longer exist as an entity after this year, but the leadership team is already planning for the next step. Roby and his partner Ross Lairson are once again in negotiations with EIV about starting up another iteration of Bayou.

A project to sell

Edmund Knolle, former vice president of business development for Crestwood Midstream Partners and currently the commercial lead for Gulf Coast Midstream Partners, has been working on the business from the other side.

Gulf Coast Midstream Partners, based in Freeport, Texas, is a project company seeking to build the first natural gas storage salt dome on the Gulf Coast in more than a decade.

According to the U.S. Energy Information Administration, salt dome storage capacity in the U.S. has been flat at 700 Bcf since 2012.

Knolle said demand for salt dome storage has returned to the same levels as in the early 2000s, and the economics are there for construction. This led to the decision that the time was right to pursue a major storage project in the area as LNG export production ramps up over the next few years. The project’s appeal to potential customers will be its reliability, he said.

“As a storage person, I think about reliability all the time,” Knolle said, pointing to the natural gas supply problems that hit the Houston area in the aftermath of Hurricane Beryl in July.

“There have been a lot of transactions involving existing storage companies in the last few years, but the large public pipeline companies typically are not developers of greenfield storage and haven’t been for many decades,” he said.

Gulf Coast Midstream Partners applied to the Texas Railroad Commission for a permit to build early in 2024. Currently, Knolle is seeking to contract with an anchor shipper for the project and then will begin efforts to secure financing.

Knolle said he is optimistic about filling a gap in demand.

More opportunities ahead

According to Bakshani, consolidation is the major mover of the energy business today. However, midstream companies will continue to find opportunities as basins build out and move into undeveloped areas as shifts in demand continue.

For industry veteran Roby, the sector remains attractive.

“What drove me into the midstream business was the sense that we are constantly building and developing to keep up with our producer counterparts. Whereas producers have all of their development happening below the surface, I love to be able to visually see it. Building pipelines, building terminals, building processing facilities—there’s a visual component to that where you actually get to see the fruit of your labor,” Roby said.