The Rise And Sale Of EagleClaw, A Southern Delaware Gas Mover

In the southern Delaware Basin’s heartland, EagleClaw Midstream Ventures LLC’s gas gathering and processing systems are sprawled across Reeves County, Texas—a 2,635-square-mile wedge of land larger than Luxembourg. The pipelines, totaling about 375 miles, continue west into Culberson County, inching up toward the New Mexico border.

EagleClaw and its financial backers, past and present, refer to the pipelines and processing centers as the company’s footprint—a jagged trail of lucrative deals and seized opportunities that led EagleClaw and its sponsor, EnCap Flatrock Midstream, to sell the company in April in a blockbuster $2-billion deal.

Funds managed by Blackstone Energy Partners LP and Blackstone Capital Partners LP made the deal—not for a Permian oil pipeline but for a system to gather and process the associated gas. The transaction is expected to close by the end of July.

Many observers, analysts and oilmen have fretted over the Permian Basin’s infrastructure—the potential of eventual bottlenecks from oil volumes overwhelming existing pipelines. But a tremendous amount of gas is also produced in the basin, second in the U.S. only to the Marcellus Shale, according to federal statistics.

David Foley, Blackstone senior managing director and Blackstone Energy Partners CEO, saw EagleClaw plainly: the largest privately held, independent gas gatherer and processor in the best basin in the country—with a quarter of a million acres of dedicated acreage, a great management team, a superb customer base and room to grow.

“This gas is associated gas. People aren’t drilling wells here really for gas production; they are drilling based on the economics of the oil produced,” Foley said. “But they’d like to take advantage of the gas volumes too.”

Rather than flare or otherwise squander the commodity, operators want to process it, move the gas along and drill their next oil well. EagleClaw already had the assets in place to do that, with more on the way.

“The company already had minimum scale, a great customer base with acreage in the right locations and we saw the Delaware Basin continuing to expand,” Foley said.

Yet, to hear it from Blackstone, the private equity firm comes in at the middle of the story. The beginning was a riskier proposition.

Tempering Steel

EagleClaw was formed in 2012 by EnCap Flatrock Midstream. It was and is helmed by president and CEO Bob Milam. The leadership team, and, fundamentally, all of the company’s employees, will remain in their current roles and are investing alongside Blackstone.

It is a Midland, Texas-based team experienced with building gathering lines and processing plants, hitting deadlines and making good on promises.

“The Permian is the area they know, grew up in and live in today,” said Bill Waldrip, managing partner and a founder of EnCap Flatrock Midstream. “Their first deal was the purchase of a small piece of pipe. I think it was literally 6 or 8 miles and a tie-in” to Kinder Morgan’s El Paso Pipeline.”

Milam said, “Our five-year relationship with EnCap Flatrock Midstream put us on the right path. They’ve been a great financial partner. EnCap Flatrock brought consistent value to our planning process.”

“The Flatrock members of our board worked side by side with our team to navigate the opportunities and challenges of our early years. They brought a lot more than growth capital. They provided technical expertise, decades of commercial experience and invaluable contacts.”

From its first small acquisitions to its eventual growth as today’s largest independent southern Delaware Basin midstream company, EagleClaw was always in search of gas—but hunting for oil.

Through a great deal of toil, research and science, Milam and his team found an area in the Delaware where “we took some risks because the well data and science weren’t fully developed, so we made an educated gamble.”

As prepared as the company was, EagleClaw still had to have “a little bit of luck to have our footprint develop as big as it has as fast as it has.” Foley points out that, in his experience, “luck tends to happen to management teams that are tireless, entrepreneurial and have a good sponsor like EnCap Flatrock.”

Milam said, “We really started building the footprint in the middle of 2014, then we rode the downturn into ’15 and ’16 and had to focus on areas that were primarily driven by oil prices—areas where producers could continue to drill.”

The EagleClaw and EnCap Flatrock teams did their homework—and a seemingly unending amount—realizing, ultimately, that they would need to have line of sight on two goals: a full understanding of the nature and profitability of the rock and an understanding of where infrastructure was insufficient to serve producers’ future needs.

They began building the company in earnest in 2014, and then held on as the price of oil drowned to its weakest in early 2016. Yet that helped clarify, without doubt, who could afford to drill and who could not.

To create a customer base, EagleClaw created a “first-mover position, ultimately bringing almost 250,000 acres under long-term dedication,” Milam said.

“We were on the edge of the science and well data with regard to the Wolfcamp play,” he added. “We did a lot of research and decided we liked the rock and, as we’ve witnessed over the past two years, the Delaware has continued to progress south and west over and beyond our footprint.”

Subterranean Hot Streak

In December 2014, one of EagleClaw’s first major deals was the purchase of gas gathering and processing assets in Reeves County that would form its East Toyah Natural Gas Processing Complex. EagleClaw bought more than 50 miles of gathering pipeline and a Joule-Thomson (JT) plant with the capacity to process 15 million cubic feet per day (MMcf/d).

The company also purchased a 60-MMcf/d cryogenic processing plant and seven new 1,700-horsepower compressors. Milam recalled it as a “little 15-million-a-day refrigerated JT plant, handling about 2.5 MMcf/d in volumes.

“Our board understood that this acquisition would expand our foothold in the play and had the foresight to support our long-term vision,” he said.

He added, “Part of the strategic placement of the East Toyah facility and the Pecos facility is where it sits. We’re currently delivering into Kinder Morgan’s El Paso [pipeline].” The pipeline runs east into the Waha market and west to the West Coast market, Milam said.

By the end of 2016, EagleClaw had signed a connection agreement with Energy Transfer Partners LP on its Comanche Trail line—a 42-inch pipe that delivers gas to markets in Mexico.

“In addition, we have a tap into Oneok’s 30-inch Roadrunner line, the new line that they have laid to the Mexico market,” Milam said. “With three pipe connects, we are able to provide our customers with quite a bit of flexibility for marketing residue gas.”

In August 2016, EagleClaw made a significant pick-up, announcing it would purchase PennTex Permian LLC’s cryogenic processing plant and pipelines in the Permian Basin.

“The PennTex acquisition doubled EagleClaw’s size in Reeves County and established a sizeable independent footprint in the basin,” EnCap Flatrock’s Waldrip said.

Over the course of building the company, Milam and team were able to add producer and dedication to continue to build “a great physical and commercial platform,” he continued. In April, the company had 320 MMcf/d of processing capacity with an expected capacity of 720 MMcf/d by year-end—with volumes growing.

“The EagleClaw team is made up of highly experienced professionals. They did an outstanding job and we’re excited to watch their story evolve.”

Exit Signs

EnCap Flatrock was willing to part with the investment for a variety of reasons. “First, I’ll tell you that the Delaware Basin is one of the best areas in the country to deploy capital. Blackstone is paying us a great value for EagleClaw’s footprint and has the ability to step in and accomplish the next tier of growth.”

Discussions to sell initiated when EnCap Flatrock began receiving a number of inbound calls about EagleClaw from prospective buyers. “That’s a signal that it’s time to be thinking about what to do with the asset in the market,” he said. “With our companies, at some point in time from a value perspective, we’re looking for an exit, generally in cash.”

While many bidders emerged for EagleClaw, the Blackstone team, led by Foley, was one of the few able to write a $2-billion check with no contingencies, payouts or other strings.

“In December, EagleClaw had just brought on a major processing plant and signed up key producer contracts,” Waldrip said. “Before we launched another large expansion, it was a good time for us to think about the market and assess the level of interest.”

Foley said companies sometimes diversify not from a position of strength but because they don’t have any attractive growth left in their core area. EagleClaw doesn’t have that problem. “We think the company’s revenue five years from now will be over 5x what is now, simply by sticking with the existing focus on gas gathering and processing,” he said. “And we think the returns on that are attractive. We definitely want to maintain that focus.”

Elsewhere, consolidation and pent-up midstream demand is likely to continue making infrastructure A&D robust. Overall, first-quarter 2017 midstream deals that were announced across the country are worth roughly $25 billion, according to Oil and Gas Investor data.

In May, NuStar Energy LP (NYSE: NS) purchased Permian oil pipeline company Navigator Energy Services LLC for nearly $1.5 billion. In March, Targa Resources Corp. (NYSE: TRGP) acquired oil and gas gathering and processing assets from Denver-based Outrigger Energy LLC for $565 million. Additional performance earn-outs could ultimately raise the price to $1.5 billion over the next two years.

“We see continuing consolidation,” Foley said. “EagleClaw is at a scale right now. We don’t need to make an acquisition to have a viable business model or achieve some minimum scale.

“With its existing customer base and a bit of incremental acreage dedications from new customers they can grow by multiples of their current size.”

Milam, who, after the sale to Blackstone, could have sat back and put his money anywhere he chose, decided to keep investing in and managing EagleClaw as its president and CEO.

“We can’t think of a spot better than the Delaware. With the team we’ve created and our ability to move forward with high-quality operations, we think we’re really going to be able to continue to drive value into this system.”

At the time the purchase agreement was executed, EagleClaw’s processing capacity included 320 MMcf/d with an additional 400 MMcf/d under construction and slated for completion by year-end. The company expects to install another 200 MMcf/d of capacity once or twice a year during the next two to three years.

Milam seems like a man with a task unfinished. “We’ve actually bought a third 200-acre site,” he said. “After we’ve taken the Pecos facility to 460 MMcf/d, [we plan] to start installing additional plants at that location.

“We are clearly focused on growth.”

Darren Barbee can be reached at dbarbee@hartenergy.com.