Taking a firm public creates a challenge for any senior management team. But doing two IPOs in one calendar year might be unique to Rice Energy Inc., which went public in January 2014, followed by the IPO of its midstream business, Rice Midstream Partners LP, in December 2014. Daniel J. Rice IV, CEO of both Rice Energy and Rice Midstream, discusses that challenge and the opportunities the firms share in their Appalachian operations area.

MIDSTREAM: Your background is in investment banking—was that a plus during the IPO process?

RICE: Yes, that background certainly helped, especially in terms of understanding the dynamics of the public markets. In addition, because we had already gone through the IPO process 11 months earlier for Rice Energy, we had a much better handle on what we needed to accomplish and what the IPO process would look like.

In fact, the Rice Midstream IPO was probably one of the quickest—if not the quickest—from initial filing to IPO for any energy company. We were able to accelerate the pace of the Rice Midstream IPO process because we had recently completed the IPO process for Rice Energy. I think that experience proved to be highly beneficial in facilitating the process for the midstream IPO.

MIDSTREAM: You are the first firm in Big Board history to take two companies public in one year. Was that a goal when you started out or did it just happen that way?

RICE: Not really, but taking the two companies public in one year was indicative of how opportunistic and nimble we are as a management team. As we were evaluating various strategic alternatives for our midstream business, we ultimately decided that a public offering was the most capital-efficient approach, in terms of being able to continue to invest in and grow our midstream business. So, we were proactive in identifying the public markets as the most optimal and logical path for us and then worked together as a team to get it across the finish line.

So for us, it wasn’t necessarily about going public, but being able to capitalize on an opportune time to access the public markets for both of our companies.

MIDSTREAM: What was the strategic rationale for taking your midstream business public and why did you choose the time frame you did?

RICE: The rationale for the midstream IPO was similar to the rationale for taking Rice Energy public in January of 2014. We simply saw a fantastic opportunity to grow our midstream business by making really good investments and the public market would give us access to that capital necessary for us to invest in the business.

The Rice Energy IPO was roughly $1.1 billion, of which $600 million were primary proceeds subsequently reinvested right back into the ground, acquiring new acreage, drilling new wells and continuing to invest in the midstream. Then when we decided to take the midstream public, it was because we saw an opportunity to continue to put more money to work on the upstream side, which inevitably drives the midstream business.

The midstream really became a financial vehicle for us to be able to feed upstream growth, which in turn fuels midstream growth. So it is a symbiotic relationship with our upstream business fueling the growth and value creation of the midstream business, with the midstream IPO proceeds funding a good chunk of that upstream growth.

MIDSTREAM: What are the differences in managing a midstream operation vs. an upstream business?

RICE: The midstream has been part of our business ever since our first well. So the upstream and midstream for us has always been viewed jointly in our pursuit of long-term value creation.

We’ve never really bifurcated between “how do we run the upstream business?” and “how do we run the midstream business?” Part of it is if you look at the management profile—the Rice management team owns 30% to 35% of the common stock in Rice Energy, and by virtue of Rice Energy’s 50% ownership of Rice Midstream, there’s great alignment between management, Rice Energy and Rice Midstream. So for both the midstream and upstream, we’re taking a really longterm view on value creation and taking a long-term view on the investments that we’re making.

We’re looking 10, 15, 20 years out across the landscape of where we want to invest our money. We do that both for the upstream and the midstream side.


All in the family: A new Rice Midstream right of way passes a frack job underway on a Rice Energy well in Pennsylvania.

Certainly one of the differences between upstream and midstream is that the upstream—especially when you’re drilling a well—is a much shorter development time frame. We drill a well in three to six months and then it produces for decades with typically minimal maintenance.

To contrast this, on the midstream side, we’re making an investment today and putting infrastructure in the ground for an investment that we expect to realize a return on over the next 20, 30, 40 or 50 years. On the midstream side, we need to be looking out further into the future than on the upstream side, because we need to make sure that we’re designing the system to accommodate, not only production from wells over the next six to 12 months, but the development of our program over the next 10 to 15 years—in addition to any third-party opportunities that we see that we can bolt onto the system.

That plays really nicely with the upstream side of the business and forces both entities to look out over the next 10 to 20 years to ensure these investments create value in the long term.

MIDSTREAM: How does a midstream component strengthen your overall organization in the Appalachians?

RICE: It goes back to why we got into the midstream in the first place. Most E&P companies choose not to do midstream because the midstream business can be very capital intensive, which takes away capital from the core part of most E&P companies, which is acquiring acreage and drilling wells.

The decision for us to build the midstream in-house was really due to a couple things. First, it gives us greater control over our destiny. The interaction and collaboration between our upstream department and our midstream department ensures that we’re designing the pipe to be of a certain size, diameter and throughput capacity to handle our production volumes at Rice for the rest of our developments, both in Pennsylvania and Ohio. It really allows us to have a tailor-made midstream system to minimize pinch points on the capacity side.

The second thing is it allows us to capture the economic value of the midstream system. We initially made investments on the midstream side because it didn’t make sense for us to pay a third-party gathering company 30 to 40 cents per Mcf [thousand cubic feet] when we were confident our volume potential could yield midstream capital costs of only 3 to 4 cents per Mcf by doing it ourselves.


The Appalachian countryside creates many challenges for pipeline contractors, including two steep hillsides and a creek crossing on Rice Midstream’s new gathering system in Washington County, Pa.

There are economic benefits and then there are the operational benefits. And one of the really neat things with Rice Midstream is it that it differentiates us vs. our peers. Rice Midstream is aligned with one of the most technically capable operators, and it’s probably in some of the highest-quality shale in the country. That’s the type of partnership any midstream company would want to have.

MIDSTREAM: What do you see as Rice Midstream’s competitive advantage?

RICE: The biggest advantage is the alignment between Rice Energy, as sponsor and majority producer, and Rice Midstream. As Rice Energy expands its position—since Rice Energy’s IPO we’ve grown its acreage position by over 50%—Rice Midstream’s opportunity set grows as well without having to pursue any third-party business.

Having a built-in, long-term growth mechanism is a huge competitive advantage for any MLP, compared to the traditional independent midstream business model that requires continued pursuit and solicitation of third-party business. We have this built-in, organic growth component within Rice Midstream that most other midstream companies don’t have.

And with that alignment comes the benefits of efficient communication between our midstream and upstream teams. These folks talk every day, which enhances our development visibility.

We’re not just 100% focused on just Rice production, however. Our gathering volumes today are roughly 85% Rice Energy and 15% from other high-quality producers in this high-quality area of the Marcellus, in and around Rice’s position. So as Rice Energy’s acreage position grows, the midstream gains a presence in these areas as well to pursue third-party opportunities that we wouldn’t otherwise be able to economically justify.

MIDSTREAM: How have current commodity price declines impacted your midstream function?

RICE: On midstream economics, 100% of our contracts are fixed fee. So there’s no percent-of-proceeds contract where we’re exposed to commodity price risk.


Rice Midstream laid this 18-inch line in Belmont County, Ohio, to move water to hydraulic fracturing projects on Rice Energy wells.

The real exposure we have to current commodity prices is indirect, and is mostly driven by a potential slowdown in drilling activity in response to declining commodity prices. Rice Midstream has greater protection from this because of its alignment with Rice Energy, an operator that has pursued a quality-over-quantity approach since we started.

We’re sitting in the core of the Marcellus where the economics work at current gas prices, and they certainly work where the strip is going in the future. Just looking at prices today, we don’t think gas prices can stay at current levels for an extended period of time because a significant portion of U.S. gas supply is uneconomic. As a result, when you’re in the core of one of the most economic gas plays in the U.S., as Rice is, there’s near certainty that development will be economic long term, which gives both Rice Energy and Rice Midstream the confidence it needs to lay out a long term plan and execute accordingly.

MIDSTREAM: Takeaway capacity has been a challenge for Marcellus and Utica producers. Are the gas transmission pipelines catching up?

RICE: This has become a really, really important question for both upstream companies and midstream companies. It has become a huge governor of producers’ ability to grow production, and especially to get their production to premium markets. One of the neat differentiators for Rice Midstream is its E&P sponsor will have 1.2 Bcf/d [billion cubic feet per day] in firm transportation by the end of 2017. That gives fantastic visibility of the upstream side, on our ability to grow production.

It does the same thing to the midstream company. I think the worst position a midstream company can be in is your acreage is dedicated from a producer that has zero firm transportation and you can’t do anything about it, you can’t force them to get firm transportation, you can’t force them to do anything. You are just stuck there because nobody’s going to develop gas into local markets or develop gas into a market where that’s not getting a good price. You need the upstream sponsor, or the dedicator of the acreage, to have firm transportation.

And so with Rice Energy, we have 1.2 Bcf/d of firm transportation that we’re going to grow into over the next couple of years. The transmission systems on the downstream side are getting built up. The challenge is a three-to-four-year lead time from idea to commissioning of those systems. When you lay out your development program, you really have to look three, four, five years ahead to account for the continued buildout of these longhaul systems.

The folks who are going to win on the midstream side at the end of the day are the guys who are doing a few things: One, they are aligned with folks who are in the core areas that work with low gas prices. Two, they are aligned with folks who have a lot of firm transportation so they have assurance of deliverability. And third, the midstream companies want to be tied into as many downstream interstate pipelines as they possibly can, because as we have seen over the last couple years, pipes can fill up and basis differentials can vary wildly within the course of just a couple months on certain pipelines. You want to have as much diversification on the downstream systems as you possibly can.

When you look at Rice Midstream, one of the ways we are pretty advantaged is our access into five or six interstate pipelines to deliver our gas all across the United States and even all the way down into Mexico. For us, that type of diversification really plays to our advantage in terms of being able to get this gas out of the basin to mitigate basis differential exposure. Rice Midstream is certainly well-positioned in terms of touching a lot of different pipelines, likely more so than any other midstream company in Appalachia.

In Pennsylvania we’re tied into Texas Eastern, Dominion, TCO, NFG, and EQT’s local systems.

Over in Ohio, when our midstream system is fully built out, we’ll be tied into Texas Eastern, Dominion, Rockies Express and finally Energy Transfer’s Rover line once that system comes online.

For Rice Energy at the upstream level, we hold firm transportation on all those pipes. That type of diversification really, really plays to our advantage in terms of having assurance of getting our gas to sales despite the tightness that you’re seeing on the firm transportation side today.

MIDSTREAM: You have a $450 million revolver to fund growth. Do you plan to expand organically or via acquisitions? And what does the dropdown inventory look like from your parent?

RICE: We’re going to be opportunistic on both fronts. You know, right after we took Rice Energy public, the first deal we did as a public E&P company was a midstream deal, and it made our E&P investors scratch their heads because we had just taken our company public and the first deal we did as a public company was acquiring a midstream system. That midstream system was an opportunity. We’re economic animals here at Rice and we saw the value potential of that system. We said, “Economically, this makes a lot of sense, operationally it makes a ton of sense given its proximity to our acreage position and our existing midstream system.”

So we remain opportunistic in terms of identifying opportunities across the board. As I mentioned earlier, building out the system ahead of Rice’s upstream growth presents more and more opportunities on the acquisition side as we touch more areas. At Rice Energy, we are building up a fantastic dry gas gathering system in eastern Ohio’s Belmont County. Similar to RMP’s [Rice Midstream Partners] Pennsylvania system, this one in Ohio is being designed to accommodate not just Rice’s production growth, but that of other producers in the area that are producing into that system. So this Ohio system becomes a logical and attractive candidate for dropdown into RMP.

Lastly, at Rice Energy we are constructing water pipeline systems that connect our wellsites to freshwater sources for hydraulic fracturing operations. It makes a lot of operational and economic sense to do so because we’re laying these water lines in conjunction with laying our steel gathering lines, which expedites the construction process. And this water business is highly economic. It costs us one to two cents per gallon to transport the water via pipeline as compared to trucking, which can cost five to seven cents per gallon.

It presents another really neat opportunity for dropdown should the IRS say that that it is qualified for MLPs.

MIDSTREAM: What are your 2015 midstream capex plans?

RICE: It’s really just a continued buildout of our midstream system in Pennsylvania. The capex is going to be around $180 million, $175 million for expansion capital investments and $5 million for maintenance. Some $85 million of it is going to construct almost 30 miles of highpressure gas pipelines, then $90 million will be for adding compression in Washington and Greene counties in southwestern Pennsylvania.

By the end of 2015, we’ll have over 100 miles of gathering pipelines in service, and the capacity of all those pipelines will be close to 4 Bcf/d. It’s going to be one of the largest gas-gathering systems in Appalachia. That was by design, just given what the volume potential could be coming out of this area. We wanted to make sure that we were prepared on the front end by making these long-term investments.

Then at Rice Energy, we’re going to invest another approximately $200 million to continue the buildout of our Ohio midstream system.

MIDSTREAM: The Marcellus and the Utica have emerged as major gas producers in their own right. Where do they go from here?

RICE: People didn’t really get a handle on what the real potential could be from the Marcellus until the last couple of years, as people continued to define the core, as people continued to refine their development techniques on the drilling and completion methods. I think we are getting to that point where we’ve defined the boundaries, we’ve defined the sweet spots, and we’ve defined the optimal ways to design these wells to extract as much of the production and reserves as we possibly can.

So I think now, at least within the Marcellus, I wouldn’t say it’s on cruise control but the cores have been defined and so the development of it becomes a whole lot more predictable and stable going forward.

Then a really neat thing happened over the last couple of years where we’re sitting on the Marcellus, which is one of the largest gas fields in the United States and in the world, and right next to it we discover the Utica. People are still getting a handle on the Utica.

We drilled our first well in the Utica at Rice Energy back in the spring of 2014, and turned that first well into sales in June 2014 and it was bigger and better than any of our Marcellus wells to date, which is pretty indicative of the production potential.

People are still defining what the core of the Utica looks like, but I think at this point the consensus is the Utica is going to be an absolutely fantastic, world-class producing field. It doesn’t have the same type of scale as the Marcellus but in terms of the sweet spots, the size of the sweet spots in the Utica will rival the Marcellus. And the sweet spots of both these plays are predominantly dry gas.

This is an exciting dynamic for our country because it not only lessens the need to import natural gas, but presents export opportunities given we’re producing more gas now than we need, than we can consume, in the United States. Midstream’s role is going to be absolutely critical, to continue to build out this infrastructure to be able to play a role in—not just satisfying the United State’s need for natural gas—but also the world’s.

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

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