Executive Q&A: A New Dawn For Oryx Midstream

[Editor's note: A version of this story appears in the March 2020 edition of Oil and Gas Investor. Subscribe to the magazine here.]

 Oryx Midstream Services is the quintes­sential tale of a private-equity-backed company getting a first-mover advan­tage and ultimately achieving a wildly profit­able exit. Formed in 2014 with $300 million in capital from Quantum Energy Partners and Post Oak Energy Capital, the company began building out gathering and transport crude infrastructure in the nascent Delaware Basin as producers were just discovering the bounty of resource there. In 2019, after investing almost $1 billion to build out infrastructure across the Delaware Basin, Oryx had grown to become the largest privately held midstream crude operator in the Permian Basin. In April, a buyer valued the company at $3.6 billion.

But the exit for Oryx and its financial back­ers was not an exit at all for the management team, led by CEO Brett Wiggs and COO Karl Pfluger. The next iteration for the Oryx team, it turns out, is once again Oryx—same company, same team—just a new private-equity sponsor resetting the baseline and the expectations.

A year ago, New York-based infrastructure private-equity fund Stonepeak Infrastructure Partners purchased Oryx while simultaneously committing new growth capital into the Mid­land-based company. The management team reinvested alongside the new ownership. Since then and with new dry powder, Oryx has com­pleted two deals.

The first, in a joint-venture agreement with Rattler Midstream LP, it established its initial footprint in the Midland Basin with the ac­quisition of Reliance Gathering LLC’s assets for $355 million. That deal added more than 160,000 dedicated gross acres, 230 miles of pipeline, 110,000 barrels (bbl) of throughput and 200,000 bbl of crude storage. The second was a purchase from Targa Resources for $135 million, which added capacity in the Delaware Basin congruous to its existing position.

Oryx now operates and transports a crude oil gathering system covering 1.3 million ded­icated acres with nearly 40 customers in the Delaware and Midland basins. Its assets in­clude more than 1,500 miles of pipe and ap­proximately 2.6 million barrels of storage, with another half million under construction. Throughput at year-end exceeded 650,000 bbl/d, with a total of more than 1 million bbl of regional transport and delivery capacity.

Prior to forming Oryx, Wiggs was a manag­ing director with EnCap Flatrock Midstream, a private-equity firm, and CEO of DFW Mid­stream Services, a Barnett Shale gas gathering company. During his career, he also worked with midstream and power companies in South America. Wiggs graduated from West Point and served in the Army as an artillery officer, including action in the first Gulf War.

Oil and Gas Investor visited with Wiggs regarding growth plans for the midstream company.

Investor: How and why did the sale to Stone­peak come about?

Wiggs: Oryx started as a traditional private-eq­uity-backed startup company five years ago. We followed the traditional strategy of pri­marily greenfield development, and our focus was entirely in the Permian Basin developing oil assets.

There was always a strategy of moving to­ward an exit for our original private-equity providers at some point. As we built the busi­ness, our capital needs continued to grow, and we reached a tipping point, a maturity in the business, where it just made sense for us to bring in new capital providers who have a lon­ger-term view on the business.

So that started conversations with Stonepeak a couple years ago. Karl and I got to know the guys and eventually it came to fruition. We changed ownership within the company, and we as a management team continue to remain excited about the business and about a capital provider that has deep pockets and will be able to provide us the capital and the opportunity to aggressively grow the business.

Investor: So in addition to being an exit, is this essentially a recapitalization for Oryx?

Wiggs: It is. Since the transaction, we’ve con­tinued to grow the business from the greenfield development side. On top of that, we’ve done two additional transactions, which has not been our traditional mode of growing the business. With the Reliance and Targa Outrigger [Crude Oil Gathering System] transactions, we were able to put incremental capital to work in growing and purchasing assets at attractive val­uations. There are a lot of good opportunities to continue to put capital to work and to grow the business in what is the best basin in the world.

Investor: What is the vision now that you’ve got new equity ownership?

Wiggs: We want to continue to capitalize on the strategic position that we have in being one of the largest aggregators of oil in the Perm­ian Basin. We want to continue to build that network. Because of the connectivity both upstream and downstream, we’re becoming more of a pipeline network within the basin that creates unique solutions and optionality for our customers as we grow the business and volumes across our system.

Investor: What opportunities will the Reliance acquisition create for Oryx?

Wiggs: It’s a good starting point and foothold for us in the Midland Basin, and something we hope to grow. We haven’t participated there in the past, so it’s a unique opportunity for us to expand and potentially create new opportuni­ties of growth all the way across the Permian. It also creates the opportunity for incremental connectivity across our system where we can utilize assets on both sides of the basin to give customers a wide range of solutions, both from a gathering footprint and from deliverability across the system.

Investor: Can you explain the overall strategy with the Targa deal in the Delaware?

Wiggs: That was a very good fit with our exist­ing system in the Delaware Basin. If you look on a map, the Oryx system pre-acquisition looks like a backward C with our original core posi­tion being in the southern Delaware, with the middle of the hole centered on Wink. With this acquisition, the pipe is perfectly suited to give us incremental reach from the gathering side in the middle of that open space on our map.

But also from a connectivity standpoint, we are able to access and link markets through that acquisition. We are able to increase the connectivity off of that system into Oryx’s regional transport system to provide current customers incremental connectivity for down­stream markets at Crane and at Midland.

Investor: What construction projects are you funding this year?

Wiggs: We’re going to continue to build out the system. We’ve got an ongoing storage ex­pansion with a half a million barrels of storage under construction today at our Pecos terminal and at our Crane terminal, and we’re proba­bly going to do some at our Midland terminal. Those are three key nexus points in the system.

In addition to that, we connect on an average between 10 and 20 new tank batteries every month, and we don’t see that slowing down in the near term. That’s a continuous effort for us. We run between seven and 10 construction crews continuously on those projects.

We just finished a major buildout of the sys­tem up into Lea County, N.M., up to Lynch Station near Hobbs. And then we’re continuing work across the system with several different pump expansion projects to support the incre­mental growth in the system.

Investor: Where are you targeting new growth? What regions do you think need additional ca­pacity?

Wiggs: The northern Delaware Basin. We con­tinue to see significant growth, and that’s an area where we’ve just expanded into. I think we’ll continue to see a need and opportunity to put incremental capacity in place. That’s a newer area for us, and we just haven’t put as much capital there, and we don’t have as big a breadth of pipe infrastructure in that region. We’ll continue to see opportunity in the north­ern Delaware.

Investor: Do you plan to aim any capex to the new Midland Basin footprint?

Wiggs: We are. First and foremost is to upgrade the system to the way that we would want to safely and reliably operate that system. On top of that we are looking at opportunities to put in new truck stations and to expand month-to-month volume with some incremental producer connections. We’ll definitely put dollars in that area so that we can continue to grow that busi­ness.

Investor: Your crude system now accommo­dates batching. Do you see oil quality in the Permian as a growing issue?

Wiggs: The simple answer is yes. When you look at the growth of light barrels in the Dela­ware Basin, the rate of growth of light barrels versus WTI barrels is dramatically higher. As the light percentage of this stream grows over time, the ability to segregate, batch and man­age those qualities is going to become more and more important. And we see a differential in pricing and a pretty significant volatility on that differential in pricing. And so if you can manage the physical assets to provide the best customer solutions for where and how those grades are managed, it’s value added for our customers.

We have the ability to batch and segregate three different grades of crude. Right now, we’re doing two grades of crude—WTI, which is 44 degrees [gravity] and below, and WTI light, which is 44 to 50. And I think we’re unique in that capability because of the way that our gathering systems were built out, and we’re unique because we have invested signif­icant amounts of capital in our system, in stor­age, to be able to appropriately manage those grades of products.

We do have the ability to segregate and batch condensate, but I just don’t see that as a big market yet.

Investor: Many industry observers predict that the Permian’s production growth will slow. If so, how would that impact your growth plans and your capex?

Wiggs:There’s definitely been a reduction in rig count. Everybody can see that, and in the end that’s going to slow the production growth. But at the same time we still see this strong production growth across the basin, and I would say that we feel pretty good about the core areas that we’re in and continuing to see that rapid growth. Our volumes in 2019 dou­bled from 250,000 to 500,000 pre-acquisitions. So we see that growth continuing. Maybe not at as high of a rapid pace, but we do continue to see and project growth across our system.

It’s a changing market, and we’ve got to be smart about how we employ capital and make sure that we’re getting appropriate returns on that capital. We’ve got to be smart about where we’re putting it and ensure that we do feel more confident about that growth. But we feel it’s there, and we continue to be excited about the opportunities to invest and create more capaci­ty and to move more barrels across the system.

Investor: What decisions do you have to make differently regarding investment?

Wiggs: I’m not sure if it’s any different than the way we’ve always looked at the business in that the value that you create in the midstream system is always determined by the value of the resource that underlies that system.

But we need to continue to have very healthy and in-depth discussions with our customers, understanding what their activity cadence looks like, where they need the capacity and making sure that we can stay in front of that. From that aspect, just good communications and good clarity on development plans and de­velopment activities.

Investor: Are you concerned about infrastruc­ture overbuild in the Permian if producers slow down?

Wiggs: We’re definitely going into an overbuild situation on long-haul takeaway pipelines out of the Permian Basin, but I think production will grow into it over time. We’ve probably got a two- to three-year period where we’re going to be overbuilt before we grow into that capacity.

Oryx does not have participation in any of those downstream out-of-basin pipes, but what we do provide for our customers is unique optionality to go to any of those major down­stream markets to make sure that they can go to the best market to sell their production and get the best net-back pricing.

Investor: What do you see as the biggest chal­lenges in 2020 for midstream companies in the Permian Basin?

Wiggs: We’ve got to continue to improve our efficiencies for building new assets in a cost-ef­ficient manner, especially in New Mexico. New Mexico is a really tough market for execution on construction projects. There are significant regulatory and permitting requirements, which causes that timeline to extend out. It’s tough from a cost standpoint. As you have more com­petition in the midstream markets, you’ve got to become more efficient. So we’ve got to continue to work on that.

Investor: Do you foresee any further acquisi­tions in the near term?

Wiggs: We’ll have to see what opportunities come out. As part of the [Stonepeak] trans­action, there is an incremental amount of committed capital that is available to us to grow the business where we see new oppor­tunities.

But at this point we’ve made two acqui­sitions pretty quickly, and we need to take a breather and get those integrated into the com­pany. I’m not sure that we’re going to go out and do a lot more in the next few months, but as we see opportunities, we’re definitely going to take a look and be aggressive about continu­ing to grow the business through greenfield and M&A.

Investor: Would you go beyond the Permian?

Wiggs: I’m never going to say never. If there are opportunities maybe we’ll take a look, but we’ve got great opportunities in the best basin in the world, and so we’ll continue to focus on that. I think probably that’s where we’ll stick to our knitting.

Investor: Do you have plans to go public, and what would need to happen first?

Wiggs: We’re backed by a private-equity infra­structure fund, and we have a little bit longer life cycle on how we can grow the business, but at some point there has to be some type of liquidity event. I’m not sure that it’s going public or potentially a merger or acquisition by a larger company. But something is going to happen along those lines.

Investor: Do you think the markets are there for you should you reach that point?

Wiggs: I think they would be for the right as­set and for the right company. I definitely think it’s more of a challenged market, but at the same time the best place to be is the Permian. We feel like we’ve got the core of the core in the Permian, through our dedications and our customers, and we’ll continue to have opportu­nities for growth because of that.

Investor: So where do you see Oryx a year from now?

Wiggs: I see us close to a million barrels a day of throughput. I see us at probably about 2,000 miles of pipe, and 3.5- to 4 million barrels of storage.

Investor: What impact did serving in the Army have on you and your career?

Wiggs: The biggest thing that you learn is about leadership, how to deal with adversity and the value that individuals can provide to a group and how you as a leader can develop that, grow it, be the part of it.

I went to West Point at 17 years old and, five years later at 22 years old, I had 65 people working for me. That was a unique opportu­nity. The experience to learn from all of those mid-level leaders in the Army that are 10-, 20-plus years older than you are, but are willing to take you under their wing and provide the guidance and leadership to grow as an individ­ual. They understand what you need to contrib­ute and how you need to be as a person to get the most out of a group of individuals to create a team and a company.

I think those things were extremely valuable to the person that I am today.