The Permian Basin is at the epicenter of the shale boom, offering midstream operators such as Medallion significant growth opportunities. But success comes through providing customers with greater value and efficiency—the bookends at either side of any successful enterprise. The company’s CEO took time to visit with Midstream Business to describe how his firm has changed to meet the needs of Permian Basin producers—and the midstream sector overall.


MIDSTREAM You have been in midstream senior management for more than 30 years. What brought you to Medallion?
LENTZ I grew up on a ranch in Southwest Texas and from there, I think I have always had quite a bit of entrepreneurial spirit. It was necessary for us to be very self-sufficient and good at problem-solving, and I think it was just natural for me to take that into my career.
I first started in the oil and gas business in the field and worked my way up to different senior positions, both in operations and on the business side. During that time, I had the opportunity to work with some really great management teams that were small, private-equity-backed companies, so that I got a lot of exposure to a lot of different problems. And subsequently, a lot of good solutions and ideas came out of that.
It’s my experience that the best ideas reveal themselves with time, learning and exposure to a variety of challenges, and that sets up well for being able to provide customers with solutions to almost any midstream problem. I went into Medallion with that thought process. It was rooted in a passion for the industry and a desire to bring a higher level of service and solutions to the Permian Basin producers. And also I think that my years in the gas business gave me a pretty unique view of the midstream value proposition that others weren’t seeing at the time on the oil side.

MIDSTREAM What sets Medallion apart?
LENTZ We say a lot to our team about being different. We certainly adhere to some key pillars in our company that allow us to bring value and efficiency to our customers and to the basin. Safety is obviously a key element for us, but we really have a rigorous commitment to operational excellence, creative customer solutions, and employee culture. When I talk about employee culture for us, and what I say to our team a lot, is that we can’t let ourselves forget that above all else we are a service company. Creating value for everyone is the type of deal creation that’s our lifeblood. It builds sustainable customer relationships.
Our team is great at building key infrastructure and finding creative solutions to different midstream problems. But our customers also need to know that they can trust us to keep our promises. I say that a lot to our team, that at the end of the day you have got to keep your promises. Our customers are trusting us with their business, and if we don’t perform then their business gets hurt—and our reputation gets hurt. Something that is important to us, to our team, is the bookends to that mission. I work hard personally to communicate that to our team— our goals, our vision. I think that’s what makes us a unified team and it allows us to keep our momentum and keep growing our business.

MIDSTREAM How has the sector changed since you’ve been in your career?
LENTZ Well, I think anyone who’s been in the business as long as I have will say that the key thing is the development of unconventional oil and gas reserves, which changed the North American midstream industry significantly by stimulating production growth. More recently, there has been invigorating growth as a result of horizontal drilling technology—hydraulic fracturing techniques and pad drilling—all of which has allowed the producing community to lower costs and increase output. That has really fueled demand for additional pipelines, as well as treating and processing facilities.
It’s not just brand-new infrastructure. A lot of times it’s expansions of older infrastructure that were never designed to handle the quantities of oil and gas being produced today.
I think that right now, too, this lower-for-longer price environment is driving a lot of different changes in our industry. When oil was $100 a barrel, producers didn’t have to worry as much about the capital that they were spending and cutting costs as much they’re having to right now. But they are really having to focus now on being capital-conscious and laser-focused on cutting operating expenses and improving netbacks.
That’s been an opportunity for us in the midstream sector. It has allowed us to step out of the shadows a little bit and come into our own. There’s more to do. Producers are looking to push more of that off to midstream companies so that they can be more capital-efficient, and it’s really stimulating growth.
At the same time, we are in an environment where midstream companies also have to be much better at managing capital, more efficient in operating infrastructure and finding creative ways to lower risk. I think in recent times you have seen a lot of partnerships between E&P companies and midstream companies, as well as other collaborative structures, and I think you’re going to see more of that. The movement to acreage dedications and long-term, largely fee-based contracts is a big component of that. Those types of models work better in scale, and I think that’s also going to cause the sector to consolidate quicker.

MIDSTREAM The Energy & Minerals Group (EMG), your private-equity partner, and Laredo Petroleum Inc. sold their interests in Medallion Gathering & Processing to Global Infrastructure Partners (GIP) in late 2017. How will having new owners change your plans for the future?
LENTZ First, let me say that The Energy & Minerals Group and Laredo were great partners. To what I was saying earlier about finding creative ways to work together, Medallion may have been one of the first midstream companies to really do a major partnership with an E&P company in the Permian Basin.
Just to be clear, Global Infrastructure Partners acquired EMG and Laredo’s ownership interest in our Midland Basin crude oil gathering business. EMG is still our private equity partner for all of Medallion’s Delaware Basin assets. With that said, we are really excited to have GIP as our new partner in our Midland Basin crude oil gathering business.
GIP is a true infrastructure company and a leading global infrastructure investor. They have a true focus on key energy infrastructure and they're different in that they also have an operating team. They focus a lot on best-practice operational management.
So, when you think about what I said before about the midstream sector having to become more efficient with our capital, with our time and with lowering risk, it’s going to be really key to have a private-equity investor that understands those things and is involved in helping us find ways to operate our business more efficiently. I think GIP is the best possible fit for Medallion, and they are going to really help us continue finding operational efficiencies and provide best-in-class midstream services.

MIDSTREAM You described Medallion’s crude oil system as the largest privately held crude oil gathering system in the Midland Basin. How does private ownership help your business strategy?
LENTZ I think as a private company, certainly, you have an easier ability to align owners and managers effectively to give you a competitive edge. Management ownership is one of the factors that helps create a level of sustainable, above-average performance that sets apart private companies from public companies. There are some great public companies out there, but whereas public companies typically have a varied shareholder base and outside directors that may be more focused on governance rather than strategy, our owners are committed to effective oversight of their investment and they have committed substantial resources including their own time to make the board more effective. As a private company, everyone is ultrafocused on business strategy and on creating sustainable value. We also don’t have to compete for capital, so we can really stay focused on a value-creation philosophy and not get distracted.

MIDSTREAM Your Wolfcamp Connector expansion was to enter service in late 2017, How did that project go?
LENTZ It went really well. Our crude oil gathering system in the Midland Basin is now up to approximately 800 miles of total pipe, both gathering and mainline. Our Wolfcamp Connector expansion is a 47-mile, 16-inch partial loop of our original 12-inch mainline between Garden City and Colorado City [Texas]. We constructed it in three phases. The first two were completed earlier, increasing our capacity significantly. The third and final phase was finished in mid-December. In addition to other delivery points off the system, this expansion increased our deliverability to the Colorado City hub to 200,000 barrels a day, and it also set us up to be able to make future expansions of capacity between Garden City and Colorado City much more quickly if a need arises.

MIDSTREAM Medallion held an open season late last year for a new crude pipeline and transportation services in the Delaware Basin. What were the results? Can you give some details about the project?
LENTZ We are excited to be expanding our crude oil gathering system into the Southern Delaware Basin. It’s a natural extension of our existing Midland Basin system. It’s the same quality of crude oil, so it’s a natural growth direction for us. The Delaware Express Pipeline, which is what we call that segment of the system, is about 60 miles of 16-inch mainline and 30 miles of smaller gathering pipeline that start at origination points in Reeves, Pecos and Ward counties [Texas]. It will move oil back to the east to various interconnection points including our Midland Basin system. We’re effectively giving Delaware Basin customers the ability to get oil from the Delaware to all of the delivery points that are provided by the Midland Basin system, such as the hubs at Colorado City, Midland and Crane [Texas].

MIDSTREAM Medallion has a strong focus on crude, but there is a natural gas gathering asset too. Describe it. Where does it fit into your overall growth strategy?
LENTZ Our Pecos River gas system is a gathering, processing and treating facility in Loving and Reeves counties, Texas. Today we have only 30 million [cubic feet] a day in processing capacity but we are in the process of building a new 120 million [cubic feet] a day cryogenic plant. That plant is scheduled to be in service in the first quarter, most likely early February, and will allow us to provide much-needed gas processing capacity to customers in Loving and Reeves counties.
It fits in with our growth strategy because, as you know, there is a lot of associated gas with Delaware Basin oil wells. It’s really astounding how much gas growth we’re seeing. It’s also an opportunity for Medallion, with both natural gas and crude oil expertise, to provide customers with bundled services and solutions.

MIDSTREAM The Permian has seen a lot of new infrastructure go into place recently thanks to the unconventional plays. Do you see the potential for a midstream overbuild?
LENTZ Not really. Clearly, the Permian is a phenomenal resource, but with Congress lifting the crude oil export ban at the end of 2015, it created a great opportunity for U.S. producers to fill that demand. I think we could have potentially seen an overbuild if we didn’t have the exports. But there is a lot of infrastructure that still needs to be built to get crude oil and natural gas out of the ground and delivered to crude oil and LNG export facilities, where we can continue to ramp up the exports to Asia and other growing regions.
Also, as midstream companies look to consolidate in order to lower cost through economy of scale, the buildout will naturally find its balance with supply and demand.

MIDSTREAM You have put a lot of new pipe in the ground in the last year or so. What does your capex look like for 2018?
LENTZ Medallion is in a great position going forward. We have invested a significant amount of money over the past three years building out the backbone of our oil and gas systems. As a result, our capital spend will be much lower, relatively speaking. That doesn’t mean that our capital spend in 2018 won’t be significant. We’ll probably spend, between the two basins, between $130 million and $150 million. But that’s pretty small relative to the amount of capital we invested over the past three years.
We’ve got a great foundation and excess capacity that we’ll be able to leverage into new projects as well as flow assurance for existing customer volume growth.

MIDSTREAM What does the midstream need that it does not have?
LENTZ When I think about our business and the industry as a whole, I believe our greatest challenge right now is finding good young people who want to make a career in this industry. That’s going to be a real challenge for us.
I can understand, given the cyclical nature of the business, that it’s difficult for young men and women to want to start a career in this industry, but I still believe that there is a bright future in our business for talented young people. Like any business, bright, talented people are our greatest resource and as an industry we are going to have to find ways to work together to bring that talent in.

Paul Hart can be reached at pdhart@hartenergy.com or 713-260-6427.

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