The History Channel and A&E Network air multiple television shows like “Storage Wars,” “American Pickers” and “Pawn Stars” dedicated to the theme of finding value in items that others have stored away and aren’t using anymore. A little bit of TLC and that item you purchased on the cheap can be sold for a small fortune.

When it comes to the midstream, the digging isn’t quite the same and the purchase and sales prices are on a whole other level, but the theme remains the same in many ways: finding value where others haven’t. It’s a strategy that has paid off well for Prism Midstream LLC.

“As a private-equity backed entity, we can’t bid effectively on nice clean assets because companies with a lower cost of capital are going to put in a bid twice the size of what we offer,” Bob Dunn, president, Prism Midstream, told Midstream Business.

“We can be effective in the acquisition market with assets that need work done to make them better assets. Sometimes that hard work is administrative in the form of reforming contracts. Sometimes it’s going out and replacing pipe and other upgrades. As a private company, the assets you can acquire are items the larger public companies don’t want to buy in their current state. They’re damaged goods in their eyes or too small,” he said.

A lottery ticket

An example of this is Prism’s 153-mile Leon County, Texas, gathering system that it acquired from MarkWest Energy Partners LP. Dunn described this system in the Eaglebine as akin to a lottery ticket. “Our goal is to expand it out with processing and upgrade it from what it is to something more attractive to potential purchasers,” he said.

Though drilling has slowed, the region is still actively being produced. This isn’t the case in many parts of the country and it represents a chance for tremendous growth.

“It’s not moving a lot of gas, about 500,000 cubic feet per day (Mcf/d) while operating at break-even, but drilling is moving close to the system. If you put a little more gas on it, then it looks very nice,” he said.

The company will continue to pick up small gas volumes while also trying to add higher volume wells to the system. As Dunn puts it, a 500 Mcf/d system looks much more attractive once you put a new 3 million cubic feet per day (MMcf/d) well on it. Value is also expected to be added through the addition of a small processing plant or building the volumes on the system up in order to improve the processing agreements.

Private backing offers advantages

This will take time, which is something that separates it from projects being developed or operated by larger companies. “Part of this strategy takes luck, patience and work. If you’re a larger company with bigger projects, this isn’t the type of asset you can afford to spend time on,” Dunn said.

Prism Midstream is also capable of taking on early commodity price exposure before transforming the asset over time for a sale to a public company.

“The goal with taking on an undervalued asset is to build it up into a nice asset that someone else values,” he said.

The private equity-backed firm has roots dating back to Prism Gas Systems LP, which began operations in 1999 with $25 million in backing from Natural Gas Partners before being acquired by Martin Midstream Partners LP for $100 million in 2005.

Most of the Prism Gas team stayed with Martin until the bulk of the old Prism Gas assets were sold to CenterPoint Energy Field Services LLC in 2012. At that point, most of this team started up a new Prism venture–Prism Midstream with Energy Spectrum Partners as its equity backer. This new venture followed the same successful strategy of the first Prism iteration: taking undervalued assets and turning them around while also developing projects that require additional work and time initially than larger companies would want to provide.

“In June 2012, we first started up a crude oil transloading facility along the Pecos Valley Southern Railroad,” Dunn said. This asset has mirrored the ups and downs that the industry has experienced the last few years as it experienced its peak volumes in May 2013 before coming down to zero when crude prices took a downturn. It reached half of its peak volumes this past spring when prices began to rebound before falling back to its current level of zero capacity due to prices falling once again and more pipelines being put into service in the region.

Finding additional value

Prism Midstream is in the process of finding ways to turn this facility around by making exportable condensate, which would be railed out of the facility to supply West Coast refineries. “We want to take an asset and make it into something more,” Dunn said.

The company tried unsuccessfully to secure three gathering and processing projects after the development of the Pecos Valley transloading facility, but was outbid on each.

“For various reasons, none of the three came to fruition, which is probably a great thing for us given the current atmosphere. I don’t think any of them would be doing well right now. It was a great disappointment at the time, but in retrospect, it’s not the worst thing that happened,” Dunn said.

Bedrock facility

Prism is currently working on the Bedrock liquids handling facility in Crockett County, Texas. This facility is primarily focused on cleaning up off-spec liquids to get them up to pipeline specifications and deliver them into the Sand Hills Pipeline to ship to the Mont Belvieu, Texas, NGL hub.

The facility, which has contracted with Enbridge Inc. as its anchor shipper, has the capability to handle up to 3,000 bbl/d of off-spec NGL and is essentially infinite with on-spec NGL, according to Dunn.

“The market is tightening on the high-vapor pressure materials, though we’re probably a bit location disadvantaged because our outlet will be truck vs. pipeline with our competitors. We are working to see if we can improve on that,” he said.

However, the low price environment is going to help the Bedrock facility, at least temporarily, according to Dunn. “The slowdown in drilling in West Texas has delayed the construction of cryogenic processing plants in the area. The market will require homes for more trucked liquids, and we will be the one stop shop for them.”

Greenfield project development is also an area in which private equity-backed companies like Prism can find themselves at an advantage since they are similar in development to the aforementioned under-valued assets.

Lift gas market

Prism also seeks to differentiate itself from the competition by delivering projects that go above and beyond to meet the needs of the producers while also delivering optimal operational efficiency and additional value. An example of this strategy is returning clean residue gas for producers to use as lift gas. This replaces bridge gas and allows producers to boost their NGL reserves by retaining the higher Btu content from their lift gas in the field compressor stations.

“We look for ways to bring value to the producer in order to distinguish ourselves from competitors. There are more than 100 private equity-backed midstream companies looking for projects. That’s a lot of competition, and you have to look for a way to bring value to the table other than just bidding at a lower price. We always try to look at how we can change our offering so it doesn’t look like other companies,” Dunn said.

Sometimes finding value in an asset can occur after the acquisition. This was the case with the Waskom, Texas, natural gas processing complex, which was owned by Prism Gas Systems before its sale to Martin Midstream Partners.

“At Waskom, we undervalued the fractionator. When we bought the system, we didn’t fully understand how valuable it would be to us,” he said.

Starting out as a 7,500 bbl/d fractionator focusing only on production from the plant, Prism Gas began bringing in several loads of trucked NGL to fractionate before adding more truckloads of heavy NGL that was put through a stabilizer. This allowed the company to upgrade product values. By the time of the sale to Martin Midstream, the fractionator had nearly doubled in size to 14,500 bbl/d.

“I can’t give us all of the credit for that facility. We hit a variety of things that worked in our favor. When we moved into East Texas there were several competing fractionators, most of which closed down since there was more capacity in the region than was needed. This gave us some additional product and market share,” Dunn said.

Long and successful strategy

Prism’s strategy of finding undervalued assets is one that has been with the company from its first iteration. In 1999, capital in the midstream was scarce and $25 million was a very large sum for a midstream company to secure as Dunn said that investors were skeptical that anything profitable could be found in the sector. Even if investors were interested in the midstream, they were not interested in having more than one company from the sector in their portfolio.

“We met with everybody that would talk to us. Back then investors might back several E&P companies, but somehow looked at midstream companies as bumping against each other. This made it a long nine-month process of talking to people and convincing them our acquisition plan was sound. It seems funny now because $25 million seems so small, but it was a big deal at the time,” he said.

By comparison, the funding for Prism Midstream consisted of one meeting with Energy Spectrum followed by a term sheet being sent over the next day, Dunn said.

Dunn’s entrance into the private sector was a result of an experience earlier in his career. He was vice president of the midstream unit of a company that chose to sell it to raise capital. The parent company needed the capital infusion to pay for acquisitions that had lost value.

While public companies have benefits such as being able to spend more on acquisitions, Dunn said that he isn’t interested in returning to the sector.

“I’d never want to go back to the public market again after working in a private company. Working with a partner like Energy Spectrum, we can get project approvals very quickly.” he said.

Besides Dunn and Senior Vice President Gene Adams, this new iteration of Prism has another familiar look to it as it reacquired a 50% interest with Panther Asset Management LLC in the Matagorda gathering system and the Fishhook Pipeline. These holdings were previously owned by Prism Gas Services.

Two more tickets

These offshore assets are two more lottery tickets that Prism bought, according to Dunn. “Energy Spectrum isn’t really set up for us to expand in the offshore field. These assets were acquired at low multiples of two to three times cash flow that can pay off if they start to increase volumes,” he said.

The Matagorda system serves Texas state waters and peaked with 200 MMcf/d in volumes and is currently flowing less than 10 MMcf/d on it while Fishhook peaked at 300 MMcf/d, but it is currently not fl owing any volumes due to the drop in production offshore Jefferson County, Texas.

“There have been some deep wells drilled near those assets. So far they’ve been unsuccessful, but if one good well hits, these pipelines will be moving a lot of gas on them and be extremely valuable. If we don’t hit the lottery on them, we paid a fair price and made money on them,” he said.

Downturn and partnerships

According to Dunn, the downturn could present some partnership opportunities with E&P companies that have embedded midstream assets as producers seek to improve their liquidity. These assets could be attractive for producers to monetize.

“I think E&P companies will be pushed to act as the borrowing base is being re-determined with prices staying at low levels. These companies may have built some of these assets because they wanted control as they were hooked up to the wells but are now willing to cede operational control,” he said.

Although Prism Midstream has yet to reach an agreement on this type of acquisition, they have been actively pursuing them. Producers will be able to secure additional capital not only through the sale of the portion of the entity, but also through operational expenses that Prism Midstream will cover.

Though there could be more opportunities for acquisitions, Dunn stated that the downturn is not impacting the company’s overall acquisition strategy of seeking undervalued assets. MLPs, with their access to larger sums of capital, can still outbid private equity companies.

“The assets we’re looking at buying from E&P companies are still not things that the MLPs would be interested in. These partnerships take a little more work and a willingness to be creative on what the terms are, which might not work for MLPs,” he said.

Taking gains, moving on

The Prism Midstream executive team is most experienced in the Texas, Louisiana, Oklahoma, New Mexico and Rockies regions, which explains why the company is focused on projects and acquisitions in these areas. That added experience represents another advantage that the company can offer to customers.

“We know the assets, drilling and regulatory environment in these areas.

We want to play on a more even playing field, preferably one where we feel we have a competitive advantage. If we can’t distinguish ourselves in a very competitive environment, than that’s an area we don’t want to operate [in],” Dunn said.

This pragmatic approach is reflected in the company’s exit strategy. Like many private equity-backed companies, Prism Midstream plans on selling its assets–either in one large deal such as was the case with Prism Gas or in piecemeal fashion. As any fan of “American Pickers” can tell you, it’s important to focus on making a profit and not waiting for a set figure.

“You get assets to the point where they are valuable on the market. When an asset is attractive and valuable on the market, you sell it. If you have a solid gain, take it and move on,” Dunn said.

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