Midstream M&A Adjusts After E&Ps’ Rampant Permian Consolidation

Scott Brown started his career in the 1990s as a plant engineer with Warren Petroleum. He worked his way up through the ranks at several energy companies, lastly at Energy Transfer, before he joined Lucid in 2013. After several iterations, the company emerged as Canes Midstream in 2019, with Brown as a founder and CEO. The company, backed by EIV Capital and Trace Capital Management, has operations in the Midland Basin, and according to East Daley Analytics, is considered one of the hotter remaining private operators in the Permian. Brown, who was nominated along with executives of Energy Transfer and Clearfork Midstream in 2023 as midstream executive of the year by D Magazine, sat down with Oil and Gas Investor for an interview in June at the company’s Dallas offices.

Sandy Segrist, senior editor of midstream, Hart Energy: Let’s start with M&A. The midstream market is warming up, and some people are saying it is already boiling over. You have been through several rounds of the process during your career. How is Canes Midstream positioned?

Scott Brown, CEO, Canes Midstream: I personally think Canes is well-positioned. We’ve got a pretty straightforward business; there are no secrets, no weird things. The timing for us just depends on a number of things we’re still trying to accomplish. We’ve accomplished a lot over the last couple of years, but we’ve got a handful of other things we’re trying to get done. For example, in July, we’re going to start up an expansion. It’s a relatively small 40 MMcf/d expansion on our processing system. We’ve got a few others that we want to get accomplished before we think the timing would be right.

SS: From the M&A deals that have been announced publicly so far, have you noticed any trends?

SB: I’m obviously focused more on the midstream M&A deals, but it seems to be that the ones that are transacting are the quality assets in quality basins. I think another trend, really over the last three or more years, [is that] buyers have been a lot more disciplined than they used to be—doing a lot more due diligence, valuing based on existing business that’s line of sight versus valuations based on a dream. Another thing I’m seeing are targeted acquisitions. It seems like it’s very clear how they fit with the buyer’s either current assets or business plan versus just out there buying anything.

SS: Some analysts have said that the Permian is so well developed that there are not a lot of major projects or midstream projects left to develop or grow. Is that more of a concern for the public majors or is it something that private companies also worry about?

SB: It’s challenging. I think it’s a concern for both publics and privates. With the consolidations, especially in public companies, and [those companies] buying up the private companies, that makes it challenging as well.

What I will say is, the Permian Basin is the basin that just keeps giving. We’ve been hearing about producers who are testing different benches, specifically in the Midland Basin where we are. It’s mostly Wolfcamp A and B, and Lower Spraberry that have been developed, but there’s a lot of testing in the Barnett, the Jo Mill, Wolfcamp D, Dean and the Upper and Middle Spraberry.

So, they continue to add benches. It feels like there is a lot of runway for a lot more growth and development. It’s just a matter of, “Is it already dedicated?” The question I have is, “Is it just those consolidators that will be doing most of the projects and expanding?”

SS: Let’s talk about your background. You went from Energy Transfer, one of the biggest publics, to private Lucid in 2013. What attracted you at that point to a private company? 

SB: First of all, I’ve got to say Energy Transfer is a great company. I have a lot of respect for those guys. They’ve built a great business, and I enjoyed my time there and learned a lot. But yeah, when the opportunity came to go to the private side, it felt like more ownership in the business versus just being one of 1,000 people working in a business. It’s really the ownership, and then the opportunity to get involved in every aspect of running a business. When I was fortunate enough to be commercial, it was a lot of fun. I met a lot of producer customers. I got to work on a lot of fun stuff at Energy Transfer. Being in a private equity-backed smaller business, you have to wear a lot of different hats and work on all different aspects of the business, which I enjoy. I’m self-motivated and just like the challenge of doing other stuff.

SS: Was it something you always planned on doing?

SB: You know, I would say, not really. When the opportunity came, I jumped at it, for sure. But it’s not something that I had always planned on. I mean, when I was younger, coming out of college with a chemical engineering degree, I thought I’d probably stay with the same company my entire career. Of course, it’s a bit of a different world now. I don’t know that I would think that coming out of college now. But no, it’s something that probably grew on me over time.

SS: You joined Lucid in 2013, then started Canes in 2019. How did things change?

SB: [Lucid] had already been established, and they had a little bit of traction on a project, and that’s when they brought me in. And we were fortunate. We were able to grow the company significantly from that point. With Canes, I had to go raise the money, get the equity backing. Then, when we were fortunate enough to be backed, go rent office space, hire a core group of people, set up payroll. I became involved in a whole lot more aspects of the business.

Lucid was already up and running. Canes had its own challenges. We got backed in late September of 2019, and then in March of 2020 everything gets shut down because of COVID. Deals weren’t getting done. It was kind of an awkward time for us. Like, “Oh, crap, how is this going to work out?” But I will tell you, our sponsors were very supportive and assured me all along the way that we would have plenty of running room to get a project; It wouldn’t be a typical two-year deal, where “you need a project, or we’re going to cut your funds.”

SS: EIV gave you your funding originally?

SB: It was originally EIV and then, when we brought Cogent [Midstream] in [2022], it was Denham [Capital], which is now Trace [Capital].

SS: As one of the founders of Canes, was there a primary idea that you brought with you that you wanted to build the company around a specific aspect of midstream?

SB: Yeah. We were looking at G&P. We looked hard at a crude line. So, we did not specifically know exactly what kind of asset we would end up owning. But whether it was going to be a green field or an acquisition, I did want a quality asset in a quality area and a team of individuals with high integrity. It was just very, very important to me. And I’m very grateful and feel very fortunate that I think we’ve achieved that. We’ve got a really good asset in one of the best basins in the world, and the team we’ve got here is really top notch.

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SS: You have two primary operations, both in the Midland Basin. You talked a little bit about growing your plant. What’s the major goal for the company right now?

SB: We’ve grown the assets. Just some statistics—the month before we acquired them, they had about 420 MMcf/d on the system. Today, we’ve got about 550 MMcf/d on the system, and we are going to about 600 MMcf/d. We’ve got 570 million of processing capacity, and once this 40 million expansion gets in, we will be capable of recovering about 70,000 bbl/d of NGLs.

We have looked at some acquisitions that didn’t make sense. We ended up not pursuing them really hard. We’ll continue to look at other acquisitions, but the primary driver is to continue to grow the business we have. We feel like we’ve got a great asset in a great area. We’ve got the G&P asset and then we’ve got a small crude system in Irion County, [Texas]. Our growth will all be on the G&P asset.