Just one year after Unit Corp. celebrated its 50th anniversary, Superior Pipeline Co.—the midstream company conducting Unit’s gathering and processing operations—is marking its 10th anniversary as a wholly owned subsidiary of the Tulsa-based parent, whose diversified operations include exploration and production activities as well as a contract drilling division.

And Superior is reaping the benefits of its prior-year investments.

“We are off to a great start in 2014, with both strong financial and operational results,” Superior’s president, Bob Parks, told Midstream Business, citing record levels of NGL production and throughput at several key facilities in spite of severe winter weather conditions in the first quarter.

Parks, who founded Superior in 1996, continued in his role as president after Unit’s acquisition of Superior in July 2004.

“I think this year will be a year in which we’ll see very nice cash flow growth with not a whole lot of capital investment required to achieve that growth,” said Larry Pinkston, CEO of Unit Corp., speaking at the Independent Petroleum Association of America’s OGIS conference in New York earlier this year.

Noting how the company’s recent processing throughput of around 150 million cubic feet per day (MMcf/d) compared to capacity of close to 350 MMcf/d, “we have a lot of room within those systems to take on more production without having to add additional capacity to those systems.”

In the meantime, Superior continues to make headway in its drive to restructure, where possible, expiring commodity price-based contracts to fee-based contracts.

Sustainable growth

“Our goal is to position this segment for sustainable growth with less exposure to commodity price volatility,” said Pinkston.

As a rule of thumb, Superior targets a minimum risk-adjusted rate of return of 15% on fee-based midstream projects, whereas the equivalent for percentage-of-proceeds projects is a targeted risk-adjusted rate of return of 25%. In 2013, Superior’s midstream contracts were 62% fee-based, as measured by volume, up from 51% in 2010. As measured by margin, its contracts were 37% fee-based, up from 15% in 2010.

Growth in midstream operations reflected heightened drilling activity in areas served by Superior’s existing systems, allowing newly drilled wells to be connected as they are completed, and adding volumes from new exploration and production customers in its areas, Parks said. In the first quarter, Superior connected 46 new wells, up from 31 wells in the final quarter of 2013.

To maximize propane recovery—spurred by sharply stronger first-quarter propane demand—Superior set course to recover all NGL and operated its processing systems in full ethane recovery mode. Coupled with improved processing capabilities, this resulted in significantly increased NGL volumes sold to just over 712,000 gallons per day, which rose 69% vs. the year-earlier quarter.

Currently, Superior has 39 active gathering systems, comprising 1,435 miles of gathering pipeline. The vast majority of these are in its midstream core operations of Oklahoma, Texas and Kansas. Superior’s Texas assets also include 53 miles of gathering pipeline serving the Wilcox play in southeast Texas. In addition, the company has expanded into Appalachia, where it has 33 miles of gathering pipeline in the Marcellus play.

Bellmon system

In the Mississippian play in northern Oklahoma, Superior has benefited from the addition of a second natural gas processing skid at its Bellmon system, which has approximately 188 miles of gathering pipeline and a 20-mile NGL line. The new skid, which became operational in January, has a capacity to process 60 MMcf/d, above the existing skid’s current stated capacity of 30 MMcf/d.

With increased drilling activity around the system, Bellmon achieved record throughput volume at its existing skid, which Parks said was processing volumes “well in excess of stated capacity,” while still maintaining expected recoveries.

“As we continue to add volumes at this facility and exceed the expected capacity on the 30 million per day plant skid, we will begin processing all the gas with the new 60 million per day processing plant skid,” said Parks. “At Bellmon, with the capital investments we have made and the available processing capacity, we are well positioned for future growth with limited capital investments.”

Parks also noted record throughput volume at Superior’s central Oklahoma facilities due to activity offered by the region’s exposure to three major formations: the Woodford Shale, the Hunton Lime and the Mississippi Lime.

Processing facilities there are the company’s Cashion and Perkins plants, which, even with record throughput, can continue to grow volumes without major investments, noted Parks.

Appalachia action

In Appalachia, the first phase of Superior’s Pittsburgh Mills gathering system consists of 14 miles of gathering pipeline and a compression station. During phase two, the pipeline will be extended north into Butler County. The company has acquired the necessary rights of way and completed the environmental and regulatory requirements for the project. Construction of the second phase is expected to begin late this year.

Parks also cited continuing efforts to examine new areas for possible midstream expansion. At Unit’s analyst day in December, Parks said Superior was “actively exploring opportunities” that may exist in the Permian, Eaglebine and Tuscaloosa plays. Were they to materialize, these would provide additional growth opportunities. In terms of capital investments, Superior’s recent investments in its midstream segment—now bearing fruit—came to $183 million and $96 million in 2012 and 2013, respectively.

Major capital investments included the new Bellmon processing facility in the Mississippian play and its Pittsburgh Mills expansion into the Marcellus play, as well as relocating two processing plants to its Reno, Kan., facility. Midstream investments for the current year are budgeted at $78 million.

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