A lot of management teams with midstream expertise have sought out private equity, organized a new partnership then ventured forth with acquisitions or greenfield developments. But most of them have operated with a comparatively short-term business plan—get things up and running, then sell and start over. It’s a basic, and generally successful, business approach.
Not so with Navitas. During the third quarter of this year, the partnership closed the purchase of an established gathering and processing system in the Permian’s Midland Basin from DCP Midstream LLC and recently announced a fourth-quarter acquisition of a gathering and processing system from Apache Corp. The combined assets include more than 1,100 miles of natural gas gathering pipelines and two cryogenic processing plants. The company plans upgrades and expansions, but Navitas’ business plan sees the systems as the cornerstone for a long-term—and growing—Permian operation.
Two of its senior executives took time to visit with Midstream Business and discuss their firm’s long-term approach and vision.
MIDSTREAM How did you come to form Navitas Midstream?
NORTHCUTT Following the sale of Copano Energy, which was back in May of 2013, Bryan Neskora, our chief operating officer, Jim Wade, our chief commercial officer, and I spent some time together talking about what we were going to do next and each one of us, both individually or as a group, were approached by private equity firms about starting up a new midstream company. The three of us had worked together on and off for over 25 years, and we knew each other’s personalities and capabilities well enough to know that we wanted to continue to work together.
Ultimately, it was an easy decision to partner with Warburg Pincus, one of the oldest and most successful private equity investors in the energy space. They have been extremely good to work with and they have great knowledge of the upstream and midstream business. The other thing about Warburg Pincus—and this kind of goes back to what we’re all about—is it’s not about a build-and-flip approach.
We’re about longevity of the asset. We’re about building a more-enduring type of company, and I think that resonated with them. We thought we could have a very collaborative relationship in growing the business.
MIDSTREAM Your focus has been on the Permian so far, which is a very mature play with a lot of midstream assets already in place. Where do you see its midstream growth prospects?
NORTHCUTT If you think about the Permian Basin, it’s been around for decades and there’s a lot of existing infrastructure. There’s a lot of competition there. But in the energy business right now, we’re seeing a lot more focus toward horizontal drilling. And with respect to a lot of these assets that are decades old, there will have to be some portion of them that are going to have to be re-piped. They’re going to need more expansion capability out of this area. So we think that there are plenty of growth opportunities.
Our decision to focus on this area was primarily driven by good-quality rock. It’s an area that’s going to be produced in a variety of commodity pricing environments. We’re in a down commodity cycle right now and there’s still a tremendous amount of active drilling in the Midland Basin.
Also, look at the Permian Basin relative to other basins. It has a lot of downstream infrastructure, so you’re not struggling to get downstream capacity on NGL pipes, or crude oil pipes or gas transmission pipes. And if you look at this basin’s proximity relative to the Texas Gulf Coast petrochemical complex, it’s great. Because of its locational advantage, embedded transportation costs are low, making it a more economic area to work than a lot of others.
NESKORA I would add a couple of things to that. I think the downturn in the commodity price cycle gave us the opportunity to pause and determine where we wanted to grow our business for the long term. And that’s the primary goal of Navitas, to create value over the long term.
When we evaluated the different producing basins in North America, both through good times and bad, the Permian Basin rose to the top very quickly. And I think we’re fortunate that we were able to get this premier position in the middle of the Midland Basin, which would not have been possible when commodity prices were high.
MIDSTREAM So low commodity prices worked to your advantage?
NORTHCUTT They did in this case, yes, absolutely.
NESKORA We also know that for Navitas to realize long-term value, prices are going to have to return to levels that encourage producers to drill. But we think the Permian Basin is the best place in North America to place a bet on the return of drilling and that is why we planted our flag here.
MIDSTREAM The Permian seems to be more active right now than other major plays, why?
NORTHCUTT I think once again, it is the quality of the rock, and the wells that are being drilled here have multiple horizons. If you look across the country at oil and gas producing regions, and then look at the plays that can produce profitably below $50 per barrel, which is effectively where we are right now, drilling in this area still makes sense—and so activity should continue. We also extensively evaluated the development of the Lower Spraberry and Wolfcamp with its various zones across this area before we bought our first asset. The future looks bright in this area, obviously.
MIDSTREAM Are you interested in other plays, and if so, where?
NORTHCUTT We are. We continue to look at opportunities across the country on an opportunistic basis. When we first began developing a business plan we asked, what was going to be the way that we would attack going back into this business?
And No. 1 is, you’ve got to look for quality rock. No. 2, you’ve got to look for a regulatory regime that welcomes oil and gas development, and we feel like we certainly have that in the Permian Basin.
The good news is that we have patient capital behind us during this downcycle. We believe that will provide an opportunity for us to look at assets that we wouldn’t normally have a chance to evaluate.
NESKORA We look at our recently acquired Midland Basin assets as Navitas’ foundational assets. There is currently tremendous opportunity in and around these assets, and we will have our hands full serving existing producers and expanding for their needs as well as providing reliable and cost effective midstream services for producers who are looking for an alternative midstream provider. So I don’t think there is an immediate need to look outside of the Permian basin to find opportunities.
NORTHCUTT If you look at our team—and we put together a very accomplished team here at Navitas—we have operated in almost every major basin in North America. And having a good partner that has capability to help us invest in other opportunities at a time when other people may be pulling in a little bit enables us to, hopefully, take advantage of opportunities when we see them.
MIDSTREAM The new year is almost here. How will your capex program change for 2016?
NORTHCUTT For 2016 from a capex standpoint, obviously we’ll be spending a fair amount of capital—maintenance capital—on the assets that we acquired, as well expansion capital to grow our footprint. We feel like we bought a good assets but we knew that we were going to need to spend capital to bring them up to current market standards. That means reducing fuel and losses, increasing reliability and lowering field pressures in order to make these systems competitive compared with other systems in the basin.
MIDSTREAM What role has Warburg Pincus played in putting together Navitas?
NORTHCUTT First of all, they’re a tremendous partner and they have a significant amount of experience. They’ve taken a lot of companies from 0 to 100 miles per hour, and many of those ultimately IPO’d as well. Their initial investment in Navitas is a $500 million equity commitment. They have been there with a very good, strong, deep capital commitment—but patient capital. A lot of their investments have been made in down commodity price environments, when other people are pulling in their reins.
They understand that we’re going to go through a cyclical business, commodity wise, and they’re willing to back us during those up-and-down periods. They do have a fair amount of investments in upstream, and they’ve been very helpful helping us get our feet underneath us on geology in new areas.
MIDSTREAM Looking at the big picture, is there still investment money available for midstream players overall?
NORTHCUTT I think there is. When you look across the industry, you don’t have to go too far to see other private equity-backed companies coming out to do business, so obviously, it creates competition. We believe that for the right project, there’s plenty of capital if you’ve got a great niche and an opportunity that offers a good rate of return.
Additionally, I think a fair amount of the money that’s looking at midstream opportunities now tends to be longer term. I think that even with the downturn, what you’re also seeing is more of the capital focused on really quality basins.
The Permian is probably as competitive now as it was when prices were $80 or $90 per barrel due to rock quality and greater upstream efficiencies. And I think you’re probably seeing that in some of the other economic plays, such as the Marcellus and Utica. As for the areas that are on the fringe, or more marginal, you probably have a lot less capital chasing those types of plays today.
MIDSTREAM You’ve seen some industry ups and downs in your career, Mr. Northcutt. What are the opportunities midstream operators might have in the current environment?
NORTHCUTT I’ve been through a few ups and downs like this. I think if you’re an existing company and you’ve The Interview got an ongoing business obviously, you’re trying to be as efficient as possible. There are differences in how you operate if you’re a public company in this environment vs. if you’re a private company.
From our standpoint, we think that this downturn—while it’s very painful for a lot of people in the industry—is an opportunity for us to, hopefully, grow. And that’s both in terms of potential acquisitions and organic growth projects around our assets. While other companies are capital constrained and may not aggressively go after opportunities, I think we still plan to be active, even in this commodity cycle.
MIDSTREAM How would you describe your management style?
NORTHCUTT I believe in open and honest communication. And I also believe in having a well-organized workforce that’s motivated, that are self-starters. I like leaders that are willing to work through issues quickly and efficiently and that put pride aside. Frankly, there’s not a lot of room for pride when you’re trying to get deals over the goal line.
I think you have to have a strong leadership team, which we definitely have. Our leaders would never ask their teams members to do something that they wouldn’t do themselves and I think our organization as a whole mirrors that.
MIDSTREAM Any projections on when a turnaround in commodity prices and in particular, gas liquids prices, will occur?
NORTHCUTT You see a lot of prognosticators out there. A lot of them think this [downturn] is going to be around for an extended period of time. I’m talking about lower crude and natural gas prices.
It’s hard to see a time in the near future when natural gas prices will return to above $3 to $3.50 per MMBtu [million Btu]. There’s just an ample supply, and we seem to be well-piped, to quickly turn on gas in places like the Marcellus and Utica or the Haynesville.
On the crude oil side, when do we see prices return there? I think it depends on a lot of things. It depends upon international demand and a lot of people have a lot of different thoughts about that right now. I think the way that we’re looking at this is we should be expecting prices to remain about where they are, or a little higher, over the next two to four years.
MIDSTREAM Around the start of the new year, the nation’s first major LNG exports are scheduled to ship. Will this make an impact on gas prices?
NORTHCUTT When you look at it, the amount of LNG that we’re going to have to ship, relative to the amount of excess production across the U.S., it should help prices, but I don’t think that LNG exports will balance the market and help drive gas prices way, way up.
I definitely support LNG exports. I think there’s a great amount of opportunity internationally for U.S. LNG in foreign markets.
NESKORA Gas producers are having so much success in places like the Marcellus and Utica, continuing to increase production, decrease drilling times and cutting costs, that producing natural gas really has become a manufacturing business. I think there will be an uptick in prices in response to new LNG demand, but I think this will be temporary as producers quickly respond by quickly increasing supply. I think natural gas prices are going to be range bound for the foreseeable future.
MIDSTREAM Where does Navitas go from here?
NORTHCUTT We are trying to build an enduring business. We’re going to be around for awhile, so our perspective is a little further out than a lot of other companies who are similarly situated and privately backed.
We bought our first flagship asset and we know we have got a lot of work to do on it. We’re already seeing other opportunities around that asset that we hope to be talking about in the very near future.

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