Midstream Business Pinnacle II Executive Q&A: Starting in the Midland Basin

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[Editor's note: A version of this story appears in the April 2021 issue of Midstream Business magazine. Subscribe to the magazine here.]

In mid-December, Houston-based Pinnacle Midstream II announced plans to build a new gas gathering and compression system in the Midland Basin, the “Dos Picos” gathering system. The gas gathering system will initially serve Midland, Martin and Glasscock counties in Texas with more than 50 miles of primarily 16-in., low- and high-pressure main lines and compression facilities. It will also provide producers in-basin processing and delivery options to multiple markets. The system is due to be in full service around the end of March, and some molecules are already moving.

DoublePoint Energy LLC will serve as the anchor customer under a 15-year gathering, processing and purchase agreement. Pinnacle is backed by Dallas-based private equity firm Energy Spectrum and funds from management. (Editor’s Note: Pioneer Natural Resources Co. agreed to acquire DoublePoint Energy on April 1.)

Pinnacle’s CEO, J. Greg Sargent, recently spoke with Midstream Business on the progress of the company’s operations.

MIDSTREAM BUSINESS: When the Dos Picos System was announced, the plan was to have it in service in the second quarter. Is it on schedule?

SARGENT: We are on schedule. Some gas is already moving on a limited basis, and we believe we will be ready to go by the end of the first quarter, or perhaps a little bit into April. The credit for our being on time, despite the pandemic and the terrible weather, goes to our great internal team and to our contractors. They did a fabulous job of planning, mobilizing and executing within an extremely tight timeline.

We also did a lot of up-front engineering and land work, allowing us to start construction quickly. It has been a fantastic working partnership among Pinnacle, DoublePoint and our contractors. Everyone has really helped with things like right-of-way, equipment, materials and personnel.

MIDSTREAM BUSINESS: This is not your first rodeo.

SARGENT: Pinnacle II is my third company. Before Pinnacle I, I founded TransTex Gas Services. That gave me the ability to begin my relationship with many different PE [private equity] firms [in advance of forming Pinnacle II]. I have to say that the midstream sector is in good shape because we have so many quality PE firms that know the business. We decided to go with Energy Spectrum, in part because they are very patient. We reconstituted the company in April 2019 with the intent of developing midstream assets in the Permian or in the Eagle Ford. We did extensive research along the way to ensure that we are good custodians of our investment capital and partners.

MIDSTREAM BUSINESS: Did that lead you to DoublePoint?

SARGENT: Eventually. The process is a bit of a chicken-and-egg situation. Producers won’t talk to anyone who does not already have backing, but the private equity providers want to know you have customers lined up. That said, there is an understanding that PE firms are going to support your G&A for a year or two. That is the common model in the industry.

This business is all about relationships, reputations, integrity and timing. It’s not six degrees of separation in the oil patch, it’s just two. Our business development group knew people at DoublePoint, and they ultimately needed midstream services. What they liked about our team is that we performed a lot of up-front engineering and materials acquisition and started to work with landowners prior to the execution of the overall deal.

“This business is all about relationships, reputations, integrity and timing. It’s not six degrees of separation in the oil patch, it’s just two.”

MIDSTREAM BUSINESS: Had DoublePoint built out at all from its wells?

SARGENT: They are a pad drilling operation with tank batteries on site. We are laying up to the tanks. DoublePoint is a world-class producer. They are very active and very well funded. The Midland Basin has the best reserves in the U.S. and in deciding to develop there, we saw a lack of midstream services. We will definitely seek other customers as we continue to expand our operational footprint.

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The whole paradigm has changed in the Midland area in that producers have migrated more to a pad drilling mentality that allows for more efficient use of drilling capital and above-ground facilities. That has led to eight to 12 wells being tied into one battery, and the need for larger and more robust midstream assets to handle the concentrated supply. The pipe must be able to gather and compress the supply efficiently to move into a processing plant or market.

MIDSTREAM BUSINESS: Do you plan to build your own gas processing plant, or take advantage of the existing capacity in the area?

SARGENT: At this point we are taking advantage of the existing gas processing in the area. When we feel we can underwrite a plant we will have those discussions.

MIDSTREAM BUSINESS: Your corporate presentation mentions water. Is that an active line of development?

SARGENT: We are not actively looking to develop water systems alone. Under a greenfield situation we would be happy to include water if it included a gas and/ or crude component to complement the investment.

MIDSTREAM BUSINESS: Was Pinnacle I also in the Permian Basin?

SARGENT: I started Pinnacle I in December 2014 with the support of BP Energy Partners out of Dallas to develop midstream in Culberson and Reeves counties of the Delaware Basin. The Sierra Grande System eventually grew to include about 100 miles of crude and gas lines and a 60 million cubic feet per day cryogenic gas processing plant. We ultimately sold it to EagleClaw Midstream in November 2018.

After the divesture to EagleClaw, the Pinnacle I management team stayed intact after the customary transitional period post divesture—chief financial officer Jason Tanous, chief operating officer Michael Hillerman and chief commercial officer Drew Ward. We had not known each other before the inception of Pinnacle I, but we liked one another from the start.

MIDSTREAM BUSINESS: How did you form your team?

SARGENT: When I started Pinnacle I it was just me and Hal Guttery who did business development and was an office manager. I met and was able to recruit Jason Tanous who came from PSI Midstream to be our CFO. He had a great understanding of both PE and banking. That took a load off me.

Pinnacle I was involved with both crude gathering as well as gas gathering, which are two very different things. It’s rare to find an operational person with experience and understanding in both. But Mike Hillerman, also formerly PSI, had significant experience with developing and operating gas and crude oil facilities. Then when Hal left I recruited Drew Ward. He has tremendous experience at such a young age. He’s one of those guys who can smell a deal.

MIDSTREAM BUSINESS: How is your relationship with Energy Spectrum?

SARGENT: Excellent. They definitely want to know what’s going on, which is fairly typical in this space. They come in and listen and give advice if we ask but are not actively involved in day-today operations. Overall, they are mostly hands-off and trust their teams to be prudent business operators and good custodians of investment capital. Because they have other teams and operations in the region, they understand the production potential of the underlying rock, can quickly understand challenges and opportunities associated with costs and available resources, and can help connect us with other teams to gain valuable insight and lessons learned. We truly appreciate the partnership mentality and experience they bring to the table.

MIDSTREAM BUSINESS: What is their exit strategy? Or rather long-term strategy, considering that the traditional hard exit to a public entity does not seem to be mandatory for PE any more. We’ve seen where firms will raise a new fund, or otherwise recapitalize a portfolio operation.

SARGENT: Funds definitely still have a fixed life, and at the end of that the portfolio operations have to be transacted somehow. We are just focused on our current development and then further growth. We are going to be aggressive and find other customers. We believe we can be a long-term player, especially as we are in the middle of the best proven and repeatable reservoirs in the U.S.

MIDSTREAM BUSINESS: Did the winter storm in February that pounded Texas and Oklahoma affect your thinking about design or the operation of your new system?

SARGENT: We do design our systems for cold weather, and we were down because of the electricity constraints which in turn caused a shortage of system supply. Still, we are reviewing operations in light of the storm.

For midstream operations, what stands out [in the recent storm] is that so many roads were closed. Freeze-offs are not unusual. But if the roads are closed you can’t get someone to the site. So, it’s important to have people in the area. We also know that the storm was hard on our people at home.

MIDSTREAM BUSINESS: What is your outlook for the new regulatory environment and the growth of renewable energy?

SARGENT: Renewable energy and traditional energy are all part of the economy. We need it all. I say let’s put this or that preference aside and develop it all. Oil and gas are going to be needed for many years to come.

We also believe that the regulatory environment will get more difficult, but that actually may be good for us. We strive to develop our system in a sustainable way that pays close attention to our environmental, social and governance responsibilities. We will try to implement new ideas and strategies that help us to be good stewards of our resources and the environment, as well as be good partners with our communities. As new regulations are promulgated we will conform, and we will prosper as we always have.

MIDSTREAM BUSINESS: How did you get your start in the oil and gas industry?

SARGENT: I grew up in Borger, Texas, where Phillips has a big refinery. [Today a 50:50 joint venture with Cenovus Energy.] I started as a roustabout at a very young age and have always been fond of the oil field. I got a scholarship to Texas Tech in mechanical engineering, and worked at the refinery summers.

I graduated in 1982, which was a very difficult time in the industry, so it took me some time to get on my feet. I started with the Tri-Star Energy in Dallas, then Stellar Energy in Houston. After Stellar [was] sold I worked at Hanover installing turnkey compressor stations and processing plants worldwide. I then started TransTex Gas Services in 2006 and sold it in 2011.