Texas sits at or near the top among the 50 states in many ways—population, economic development, geography, political power and more. But in no sector does it stand out more than in energy—and its sprawling midstream sector makes it all work.
On that impressive backdrop, Hart Energy’s first Midstream Texas conference attracted a top-notch list of speakers who presented to a packed house in San Antonio. All of the presentations focused on where the Lone Star State’s midstream industry is—and where it will be going. The conference agenda covered a wide variety of topics, from field gathering in West Texas, to processing condensate in the Panhandle, to downstream growth prospects and dockage on the Gulf Coast.
Opportunities in all cycles
Barry Davis, CEO of EnLink Midstream, set the conference tone in his opening keynote focused on “Texas’ Outsized Role in the Midstream Buildout.” Davis reviewed the last 10 years in the industry and looked forward to an upbeat future, saying this is “a great time to do great things in this industry,” then added the industry is “very well-equipped” for the challenges it is facing.
“We believe there are opportunities to do things in all cycles,” Davis emphasized. “If this is a cyclical business, we have to gain some confidence in what we’ve been able to do as an industry to overcome the challenges that we faced in the past,” he said. “This industry has never seen a challenge it couldn’t overcome.”
If Texas is where the West begins, then the industry should remember “this ain’t our first rodeo. We’ve seen these challenges and lower oil prices, and we always recover,” Davis continued.
He projected the industry’s demand-driven growth will continue through 2020. Gas demand will continue to be driven by everything in the Gulf Coast, he said. Power generation will continue to grow in the South and Southeast. Additionally, next year will be a breakthrough year for LNG ex-ports. Large industrial demand growth will be seen on the Gulf Coast as well.
What gas needs
One of the conference panel discussions looked closely at the needs of the gas side of the business. Midstream can—and must—play an important role in rebalancing energy supply and demand, the three panelists agreed.
Mike Latchem, managing director and CEO of Lucid Energy Group; Gary Conway, principal, president and CEO of Vaquero Midstream LLC; and Robert E. Dunn, president of Prism Midstream LLC; focused on the Permian Basin but noted midstream’s role in improving the gas market is much the same in all North American plays. Also, the crude oil and NGL markets tie closely to what happens to gas, they added.
The energy industry’s goal must be to “reset the market,” Latchem said.
“What do we need as a gas market?” he asked. Above all, midstream opera-tors “need to sell service first. Lucid will continue to do what we do best—build a reputation for service. It’s our job to figure out the netback costs to producers and see if we can come up with creative solutions. If we do that, we will always have investment opportunities.
“We will have a ceiling on gas prices, that will be floating just above our heads, for quite some time,” Latchem said. Meanwhile, the midstream must “debottleneck demand” so that producers can reach more markets. “Our challenge in midstream is going to be to find a way to help that netback price for producers.”
Conway agreed, adding “we need to do what we can on our part; the prices are going to be what the prices are going to be.” In the meantime, the midstream needs to be “resilient, we need to take some of the risk ourselves and go ahead and get some of the infrastructure in place so that when the markets do come back, and prices are where they need to be for these producers, they’re not hampered.”
Watching Waha
“We have over-performers on one end and the Waha [gas trading hub] market has a great lot of demand,” Conway said. “This is what Vaquero does, take away the constraints that are there on production. Everybody is a first-tier customer and client. We don’t know the economic price points of each producer and each is a little bit different. There has been a lot of upstream investment and producers need a quality [mid-stream] solution, like Vaquero.”
When will the price recovery begin? The inevitable question brought chuck-les from the roundtable participants.
“If I knew that I would be calling you from my yacht,” Dunn quipped to laughter from several hundred conference attendees. “If we can get a $4 to $5 [per thousand cubic feet] gas market, we will see a lot of new gas that will be easy to develop.”
There are many price predictions but Dunn said “it really all depends on crude.” In particular, higher crude prices will open up demand for U.S. LNG since international LNG prices are typically based on a crude price formula.
“The real swing will be tied to LNG and that’s tied to crude oil. But with the recovery in crude oil prices, U.S. LNG will be very competitive,” Dunn added. What happens with new pipeline capacity to the Northeast and New England will have a significant impact on gas demand and prices too, he said.
Delaware Basin action
Brian Freed, vice president of western commercial operations at Crestwood Equity Partners, presented a spotlight on the Permian’s active Delaware Basin from his firm’s perspective.
“Everyone’s got their numbers on when things will turn around,” Freed told the conference, adding “but rigs are still operating in the Delaware Basin.”
The firm has announced it could spend as much as $1 billion to expand its Delaware infrastructure by 2019.
“The Wolfcamp is very prolific, and that’s a good problem to have,” Freed added, “Activity is at a high level.”
The Permian may hold the largest share of Texas midstream action right now but the Texas Panhandle—part of the multiple Midcontinent plays—has stayed busy too.
Greg Piper, president and CEO of CP Energy, said Midcontinent midstream players are working closely with producers during this challenging time.
“What we have to do every day is try to find a way to give [producers] the best netback at their wellhead, and we’ve been active in these regions [Texas, Oklahoma, Kansas, New Mexico and Colorado] since 1997 doing that. A big thing we do is purchase the crude oil, and we’re purchasing a lot of condensate now and getting that efficiently to our markets—either markets they’re selling to or markets we’re selling to for buying at the leases,” Piper said.
Condensate ‘paramount’
Privately owned CP Energy provides crude, condensate and natural gas services, which include purchasing and marketing, transportation and logistics and midstream infrastructure. The condensate part of CP Energy’s business has picked up since the 2014 decision that determined very light, minimally processed crude can be exported.
“There’s a lot more condensate. And in the Midcontinent, the ability to blend away or take away that lighter barrel is becoming more paramount every day. That’s one reason you need a bigger network of oil to get to if you’re on the marketing side. You’ve got to have certain oils to blend away the lighter condensates and the lighter crudes,” Piper said. “The condensate and the lighter barrel are getting more and more prevalent across the Midcontinent, and the ability to take that away and handle that is becoming more and more important every day.
“The Panhandle is struggling with both refining costs [and] the type of oil that’s out there. The Granite Wash is [producing] very light, sweet barrels. And so there are some challenges out there in the Panhandle,” Piper added. Despite these challenges, Piper said the company plans on expanding in the Midcontinent region.
Getting ready for oil exports Condensate can be exported now but the big demand question is when—or if—crude exports will begin. Terminal operators on the Texas Gulf Coast are planning for when that day comes.
A.J. Brass is an energy executive, not a guru, but the CEO of Houston-based Gravity Midstream LLC nevertheless offered his mantra to a conference crowd that has been rattled by a year of low commodity prices and a shaky outlook:
In times of volatility, value optionality. “We always try and look at different ways that we utilize assets and think about where we are in the overall flow of oil,” he said. “We think about what we can do differently in this industry and as a company with our assets, while things are upset, to bridge gaps.”
His company has developed the Gravity Oil Terminal at Corpus Christi (GOTAC), a 44-acre deepwater liquid petroleum storage terminal on the Corpus Christi Ship Channel to handle four modes of transportation—pipeline, ships, trucks and rail. By mid-2016, the dock will be ready for Aframax tankers. It also has its own crude processing unit.
GOTAC is designed for a post-crude export ban world. Gravity has positioned itself to handle light oil from the Permian Basin and Eagle Ford Shale plays when the crude export ban is lifted.
Brass believes that will happen be-cause he already sees it happening in the futures markets, which have Brent trending up into the $60s by 2018. Inherent risks in the business may also play themselves out.
“We live in an extremely volatile time,” he said, “so the potential for geo-political events causing disruption and thus price disruption are high, relatively speaking, and at some point there’s an expectation that the U.S. is going to have look at the current ban on crude oil exports.”
The financial side
So how will the midstream pay for all the new and repurposed infrastructure producers will need in the next few years?
Neither the midstream’s popular MLP structure, nor the midstream sec-tor itself, are broken, a trio of finance experts told attendees. Being stuck in a downcycle might make it appear that way, though.
“I think some MLPs are broken, but I don’t think the MLP space is broken,” said Peter Augustini, partner with Energy Spectrum Capital. “Some of the MLPs were wandering into the area where private equity was more appropriate.”
The financial experts were responding to a question that challenged their relatively bullish outlooks for the sector, given the upstream’s commodity price-induced doldrums. They stressed that the MLP structure and the mid-stream energy sector were not one and the same, despite conditions that have brought the two together.
MLPs make sense
“For certain companies of certain size with a certain history, it may be advantageous to move to a C corp model, but generally speaking, MLP makes a lot of sense,” said Brandon Blossman, managing director of Tudor, Pickering, Holt & Co. LLC. “MLPs are codified into tax law as being largely an energy-type investment, so thank the IRS legislators for allowing that, but mid-stream would exist with or without the MLP. The MLP is just a tax-efficient way for largely retail investors to invest in infrastructure assets.”
What’s changed since limited partnerships began their market ascent, in tandem with the boom in unconventional oil and gas production, is the overall size of the sector. Success has meant that some players have outgrown the MLP structure, perhaps giving the retail investor the impression that it’s time to pivot toward incorporation. Not necessarily.
“The advantage of a C corp today is that midstream is a much bigger sector than it was five years ago,” Blossman said. “You have to access more investors in total than you have, historically. It’s not a small space anymore; it’s a big part of the energy landscape. It’s a big part of the public equity landscape today. You need C corps for the larger companies to access the investors that can only invest in C corps—they don’t have the structure and back office to invest in MLPs.”
Augustini said Energy Spectrum Capital’s strategy for the last seven or eight years has depended heavily on MLPs as the exit market for assets built up from a private equity standpoint.
“We view our cost of capital in the 20%-plus range and it’s hard to get those kind of returns competing head-to-head with MLPs or existing assets with strong cash flow,” Augustini said. “We’ve positioned our activities to feed into the MLPs, particularly more in the early stage to take a little bit more of the growth capital on in, say, a greenfield project before there is cash flow.”
Morriss Hurt, managing director of Encap Flatrock Midstream, said in his panel presentation his firm follows a similar strategy: “Get in early, take on some of that early-stage risk, hopefully for an outsized reward if we did our homework right, and also get lucky, which is a part of success for everyone.”
Echoing other presenters’ projections, the North American midstream’s future is bright in the eyes of Tudor, Pickering.
“Midstream as a sector is likely to do quite well, we believe very well,” Blossman said. “Not this year, not next perhaps but in the very near future.”

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