The name may not be familiar to midstream leaders but its players are. PennTex Midstream (PTXP) started up less than two years ago and went public earlier this year as a master limited partnership listed on NASDAQ with a $225 million IPO. Its executive suite includes senior managers with approximately 200 years of combined midstream management experience. Previous assignments by its senior executives include a who’s who of corporate names, including Southern Union, Williams, El Paso, Shell, Tudor, Pickering, Holt & Co and Energy Transfer Partners, among others.
That expertise, coupled with attractive assets in North Louisiana’s Terryville Complex and the Permian’s Delaware Basin, create significant growth potential, according to Chairman and CEO Tom Karam, who took time to discuss PennTex with Midstream Business.
MIDSTREAM You have extensive personal experience in the midstream business, how did that background shape your goals for the startup that became PennTex?
KARAM First, I think that the midstream energy sector is just a fantastic sector to work in. It has one of the most remarkable workforces with loyal, dedicated, professional people. So you’re doing exciting things with really great people. It’s a very fulfilling industry. How my background shaped my attitude and my thinking toward PennTex is, first and foremost, we want to always build and operate assets safely and reliably, but more importantly or as important, we want to be very entrepreneurial in how we approach the business and the growth of PennTex.
To have a business where your assets and your contracts are strong and you bring an entrepreneurial spirit is something that all of our employees will benefit from and find rewarding. We want to make sure that we have an entrepreneurial bent at PennTex. It’s always a great opportunity—and it’s a rare opportunity—to start a company from scratch where you handpick the people who will then create the culture of the company. And our culture is one of respect and openness and everybody does their job and does what needs to be done, and it’s very rewarding to have that opportunity in a career.
MIDSTREAM How would you define PennTex? What are your strengths?
KARAM PennTex is a new company. We formed PennTex in January 2014 but none of us who manage and run the company are new to the business. We have worked with each other—in many cases for decades. We have all come to learn, from the school of hard knocks, how to run a good and a reliable business. And we have learned how to rely on each other to execute.
I think that from a PennTex standpoint I would want producers to know that there’s a huge difference between a new name and a new team. We are a new name but we are not a new team.
MIDSTREAM You have the new, 200 million-cubic-feet-per-day Mt. Olive gas plant and the PennTex NGL Pipeline in Louisiana coming online in the fourth quarter. How are those projects progressing? Have they faced unexpected challenges?
KARAM You always expect challenges when you’re building energy infrastructure. Our first plant at Arcadia, La., and associated pipelines came online in May. They're running quite well right now. As a matter of fact, our first plant is running at nameplate capacity or slightly above, which is really a good thing. We placed our new Mt. Olive gas processing plant online in September with some additional, associated pipelines.
We learned a lot of lessons building the first plant and pipes, and we were able to more efficiently plan our schedule for our second plant. We’re really happy with the fact that we are going to bring these two plants and all of the associated pipelines online on time and on budget, and that’s no small feat.
MIDSTREAM Please provide some background on the Terryville Complex. What are the drilling targets and what do you see for the future of the oil and gas business in that region?
KARAM Our public company assets support production in the Terryville Complex in North Louisiana, which is within the Cotton Valley formation. The Cotton Valley has been around for 50-plus years and is very well known. Largely for those 50 years it has been produced with vertical wells. Some of the largest production companies in the country have operated in the Cotton Valley, not the least of which was Anadarko Petroleum [Corp.]. The Terryville Complex is an overpressured complex that currently targets four different zones that the producers define as the Upper Red, Lower Red, Upper Deep Pink and Lower Deep Pink. The Upper Red is the most prolific to date.
Producers have yet to fully delineate what this overpressured Terryville Complex is, which means that as more producers become active there, they will continue to delineate the expansive nature of the field. It is one of the lowest-cost basins in all of the Lower 48 states. And based on our research—and data that’s been produced by others—the well economics are, if not the highest, then among the highest in the Lower 48. That’s particularly true for Memorial Resource Development, which is the primary producer and our anchor customer in the Terryville. We’re very bullish on the continued growth of production in North Louisiana.
MIDSTREAM What are your plans for your Permian Basin assets?
KARAM You know, we like the Permian, and we like our platform in the southern Delaware Basin of the Permian. We currently have a 60 million cubic-feet-per-day plant and about 75 miles of gas-gathering operations in Reeves County, Texas, in the southern Delaware. That plant is running just about full.
The Permian, as is well reported, is the gift that keeps on giving. There are so many zones and opportunities in the Permian that are still economic in this market that it is really where you want to be if you own assets in the midstream sector.
MIDSTREAM PennTex common units started trading on NASDAQ in June. How would you rate the stock market’s interest in midstream operators currently, given weak commodity prices?
KARAM When we initially started to trade on June 4, I stated in a couple of interviews that we were coming public against a difficult tape. Nothing has changed since June 4 other than the fact the tape has gotten more difficult.
But I think what you are seeing is a dearth of buyers in the MLP space, which has accelerated and exacerbated some of the downward trends. Unfortunately, there is a disconnect between how the market is valuing our units and how we are running the business.
One differentiating factor with respect to PTXP is our relative lack of exposure to commodity prices. For our North Louisiana business—the public MLP—our revenues are 100% fee based and approximately 75% take or pay. So while commodity prices are fluctuating, we have multiple barriers of insulation against that, first being the strength of our underlying take-or-pay contracts. The second is the individual well economics and the IRRs [internal rate of return] that Memorial Resource Development is experiencing in North Louisiana. So we do have differentiating factors as they relate to the volatility and commodity pricing of today.
MIDSTREAM Natural Gas Partners, an active private equity firm in the midstream, was your capital sponsor. How does PennTex fit into its portfolio?
KARAM NGP is a wonderful private equity sponsor and partner, and we’re very grateful for their involvement with PennTex. They focus primarily on the upstream sector and have funded, over the course of a couple decades, more than 80 upstream companies. I think it would not be a stretch to say that we are introduced to their current and past portfolio companies as a preferred midstream provider. Clearly this offers us an opportunity for additional growth at PennTex because we can have discussions with multiple producers in various basins across the country.
MIDSTREAM How would you describe your management style?
KARAM That is a great question. When you lay the CEO’s management style on top of the fact that you are founding a brand-new company, it becomes even more important because the culture and attitude of any company, I believe, starts with the senior executives.
First and foremost, you have to have really talented, dedicated people around you, and you have to develop a clear and achievable strategy. From that point, I think my job and my style is to clearly articulate that strategy internally and externally and to do everything I can to facilitate those around me being able to do their jobs to execute, then get out of the way so that you manage with your nose in and your hands out. You allow the really bright professional people you have around you to do what you hired them to do.
MIDSTREAM Where does PennTex go from here? What are your growth plans for 2016 and beyond?
KARAM Notwithstanding the current dislocation in the market, we really like where we sit for a couple reasons. We have a tremendous foothold in North Louisiana to continue to build infrastructure to serve Memorial Resource Development and other producers in that area for several years to come. We will absolutely focus on execution to build the infrastructure that will be a core driver of our growth.
And as I said earlier, we like our position in the Permian, and we will continue to execute on growth opportunities there by adding additional customers and facilities. So when you couple the North Louisiana Terryville Complex with the Permian, we really do have a double-barreled foundation that differentiates us from many of the other midstream provider MLPs in our sector. I think this puts us in the top tier for quality of assets, quality of contracts and growth trajectory.
As we look at the next couple of years, we think that we are going to be able to grow in that top tier of MLPs without creating a risk profile that would challenge having a conservative balance sheet. Beyond that, our management team is transaction-oriented. This isn’t our first rodeo. We have all been down the path of buying and integrating assets and companies in our industry. So we expect to be active on the M&A front, but we will be very disciplined because the gatekeeping issue on any acquisition would be: Does it add to our story and the strength of our growth?
We have the luxury of imbedded growth, and we can be very discerning as to the deals we choose to do in the future.
Clearly, we would look toward, as I describe it, a dashboard of criteria. First among them would be additional basin diversification. Then look at counterparty strength, contract strength and growth opportunities that would be embedded there. Given the continued volatility in the market, there may be some quality assets that come available over the coming months. And we want to make sure that we have the capacity and the liquidity to act when we see something that we really like.
MIDSTREAM How can midstream operators assist producers currently challenged by low commodity prices?
KARAM I think the most important thing that we need to do as a service provider to upstream companies is to offer safe, reliable and available services to them so that we minimize the downtime at our facilities, so that they can get their product to market at the best netback to them. We must make sure that we construct state-of-the-art, efficient facilities that will allow us to do that—such as the two, 200 million-a-day cryo plants that we have constructed in North Louisiana, which are high-efficiency facilities.
It’s incumbent upon us to always be focused on reliability of our assets, efficiency of our assets and doing what we say we’re going to do when we say we’re going to do it. And again, if we are transparent with our producers, that’s going to allow them to do what they do best.
MIDSTREAM What do you see as the biggest challenges to the midstream at this time?
KARAM I think I can place the challenges to the midstream sector in a couple different buckets from our perspective. Clearly, the first bucket would be that when commodity prices are low, the level of activity by the producers is reduced, thereby reducing the need for additional infrastructure and the volumes that flow through that infrastructure. That’s something that we cannot control, we can simply be prepared for and reactive when it happens.
Then another bucket is where you operate geographically and being able to navigate the regulatory and community issues that you will always face as you seek to install infrastructure. You have to be very in-tune to being responsible and good neighbors in the communities in which you do business. Also, you have to be a superior company as it relates to over-complying with the regulatory requirements in any particular area.
However, those challenges will always be realities of the business. Superior companies know how to navigate them.

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