Upstream, Midstream: An Interview with Rod J. Sailor

The BBC drama “Upstairs, Downstairs” highlighted the differences in the two social classes that made a classic British household function. In a similar manner, energy’s upstream and midstream sectors must work together for success.

Rod J. Sailor, president and CEO of Oklahoma City-based Enable Midstream Partners LP, has served in executive positions for both. Enable ranks No. 17 on this publication’s Midstream 50 of the sector’s largest publicly held firms. Sailor recently took time to share with Midstream Business his insights on how the sectors differ—and how their entrepreneurial spirit will help both achieve profitability in the decade ahead.

MIDSTREAM:  How did you get into midstream, and can you talk about your time spent in the upstream side of the business?

SAILOR:  That is a great question. When I graduated from Oklahoma State University over 30 years ago, I was getting married and needed a job. I had a number of interviews and, given that I was in the Midcontinent, most of those interviews were with either energy or energy-related firms. I got a job at The Williams Cos. in the accounting group that wasn’t even full time. But you know, I thought it’d turn into something permanent, and it did. I figured I’d be there four or five years—then I found myself 27 years later having done a number of things I really, really liked at Williams. 

They gave me a lot of opportunities. Over my 27-year career at Williams, I moved on to focus on corporate finance, strategic planning and development, and international finance. These roles gave me broad exposure to Williams’ midstream businesses, and I was even involved for a few years in a communications business that Williams built during my tenure. 

During my time as treasurer at Williams, I was closely involved in the spinoff of Williams’ E&P interests into WPX Energy [Inc.]. I joined WPX as CFO when it went public in 2011. I loved that opportunity to go over and focus on upstream with Ralph Hill [the first CEO of WPX, now CEO of ETX Energy]. 

After a few years at WPX, I decided that I needed to get back to the midstream side of the business because that is, as I look back over my career, the part of the energy business that I really enjoyed, what I call the horizontal part of the energy spectrum. I enjoy building long­term value, thinking about projects, thinking about long-term returns. It has always had sort of a special place in my heart. So, when I had a chance to jump back out of upstream into midstream for the CFO role at Enable in 2014, I relished the opportunity. I’m so, so glad that I was selected to come over here, and it’s been a great ride during my six years at Enable. 

MIDSTREAM:  How would you compare/contrast managing the two sectors? 

SAILOR:  Obviously, both sectors have a significant focus on safety and the environment. I sometimes get frustrated, as I’m sure everyone in the energy industry does, with the view that we are not focused on the environment. I’ve always worked at companies where being a good steward of the environment was a fundamental tenet of the business. 

One thing about the energy business that I have always enjoyed is its entrepreneurial spirit. Upstream and midstream businesses are always looking for the next opportunity because we deal with a depleting resource. We don’t have the luxury of just standing pat. 

The upstream industry is very focused on science and the high degree of technical expertise required to extract hydrocarbons. To survive, companies must own the right acreage in the right places and drill and complete wells in the most efficient and economical way possible. 

The midstream business requires a long-term focus on asset and capital deployment. We’re building 15-year, 20-year projects, and we’ve got to be sure we’re designing projects that will generate returns over a long period of time. We are much more than a commodity business in midstream. Whether we are serving upstream or end-user customers, we have to make sure we are creating the right solutions to get products to the right markets. 

Here at Enable, I really like to say we have a customer solution model, and customer service is a fundamental value at the company. I think that’s something that differentiates the midstream space from the upstream space. 

MIDSTREAM:  How can the midstream get in Wall Street’s favor again? 

SAILOR:  We clearly have faced some challenges over the last couple of years. The investor base in energy has changed. While Enable never cut its distribution, there were a number of restructurings and distribution cuts in the midstream space following the price collapse in 2014. Frankly, investors have had better places to put capital, and we’ve fallen out of favor. But this is a cyclical business, and we provide a needed product and service. 

If you look at the business fundamentals, most of the top producers and midstream companies have done a really good job of building strong balance sheets, living within cash flow and focusing on returns rather than just growth. If we continue to execute well and run our businesses in a sound and prudent manner, investors will find us once again. 

MIDSTREAM: Your background’s in corporate finance; is that a plus in the current business environment? 

SAILOR: Well, I would tell you that I think a good grounding in corporate finance matters in any environment, but right now I think it is especially important. Companies that have not demonstrated financial discipline continue to struggle. Markets can and do change quickly, and you must run your business with that in mind. At Enable, we’re confident about our cost structure, our liquidity, our balance sheet. Every decision, every dollar we spend, is aimed toward long-term value creation. 

MIDSTREAM: Do you see a continuing role for the master limited partnership structure in the midstream? 

SAILOR: Yes, we’ve been talking a lot about that, both internally to our employees and to investors. I’ve seen a lot of structures come, and a lot of structures go—some in favor, some out of favor. Clearly, the MLP structure does not have the prominence in the space that it once did. At one time, you could have said MLP and midstream are interchangeable because I don’t think there was a major midstream company that wasn’t an MLP. 

But it’s changing, we have to recognize that. I still think that the public partnership model works, but we clearly will have to continue to think about making sure we’re giving investors what they need. You’ve seen incentive distribution rights (IDRs) go away from a lot of our peers. You’ve seen better governance. You’ve seen that a lot of investors don’t want a [IRS Form] K-1, they want Form 1099. 

It’s clear that the market is moving towards MLP 2.0.

The one thing I think we have to recognize is that corporate structure transformations generally come with a cost, and this cost must be considered when evaluating corporate structure changes. Also, many of the companies that converted to C-corps are not cash taxpayers today, but they will be in the future. In addition, the low tax rates that exist today are not guaranteed to continue forever. 

Again, I think the structure works, and the Alerian MLP Index still represents over $250 billion of market capitalization. The MLP structure has given a lot of cash back to investors, and it continues to return a lot of cash back to investors. 

MIDSTREAM: How will the growth in U.S. hydrocarbon exports impact Enable? 

SAILOR: All of our customers now want to talk about getting to water, to access export markets. Everybody understands that hydrocarbons, whether it’s natural gas, natural gas liquids or crude, are moving more and more towards the coast, and international demand is a key driver for most of the products we handle. 

Get a map of the country out and look at where hydrocarbons are being produced and where hydrocarbons need to go. If you draw a line between those locations, you’re probably going to cross some of our assets. We’re already benefiting from the movement of natural gas to international markets with our Gulf Run Pipeline, where we’ll extend our pipeline network all the way down to the Gulf. 

We will continue to benefit as an industry from the continued export of hydrocarbons out of the United States. I would be remiss if I didn’t mention that Harold Hamm of Continental Resources [Inc.], one of our largest customers, played a significant role in getting the 40-year-old crude export ban lifted in 2015, a change that is benefiting all of us. 

MIDSTREAM: Enable, like many sector players, pulled back on capex plans for this year. Do you feel you’ll still be able to meet customers’ growth needs? 

SAILOR:  We meet regularly with our customers. We’re always talking to them about their needs, and we are confident that our capital expenditures will be able to meet our customers’ growth plans. Our gathering and processing capital expenditure program is very flexible, and we can ramp our spending up or down quickly as producer activity develops. We are also able to minimize our capital spending by leveraging the investments we have made over the past few years, including significant investments in processing, compression and pipeline capacity. 

As an industry, we continue to look for ways to work together to leverage underutilized capacity. An excellent example of this is our Wildcat project, where we partnered with a competitor to access an additional 400 million cubic feet per day of third-party processing capacity and provide a customer access to the Texas intrastate natural gas markets. 

MIDSTREAM: That said, you do have some major projects in the works. Could you provide an update? 

SAILOR: I mentioned earlier Gulf Run, our biggest current pipeline project, which will extend our existing Louisiana system down to the Gulf to provide access to international markets. It is an exciting project that leverages our current pipeline infrastructure to provide customers access to some of the most prolific natural gas producing regions in the U.S. The project’s cornerstone shipper is Golden Pass LNG, a partnership between Qatar Petroleum and ExxonMobil [Corp.], both leaders in producing, shipping and marketing natural gas worldwide. In 2019, we went through the pre-filing process for the project. In the first half of 2020, we plan to file a formal certificate application with FERC. We’re already out getting right-of-way for that project and spending some capital dollars. Our intent is to put that project in service late in 2022. 

MIDSTREAM: You mentioned earlier you’ve been through a lot of business cycles. Do you have any insights on how the current trough may be different? 

SAILOR: Yes, I do. The upstream industry has responded well to the current cycle. It’s no longer about production growth and creating net asset value. Now, it’s about running the upstream model more like our model— let’s live within cash flow. Let’s be prudent about our balance sheet, let’s be prudent about getting some money back into investors’ hands. As with past cycles, there will be winners and losers. As we move away from the growth mode of prior years, it will become more apparent which oil and gas plays can generate solid returns and which plays are more challenged. 

MIDSTREAM: How do you motivate your team internally during tough times? 

SAILOR: We really have talked to our folks about focusing on the things that we can control. It’s easy to say, “Oh woe is me,” but let’s focus on what we can control. I think it’s important to continually communicate. We remind our employees about the good things that are happening inside the company and that we’ve continued to execute at a very high level. We can’t always control what happens outside the company, but we can control what happens inside the four walls of Enable. 

We started a culture of continuous improvement back in 2016, and it continues to pay dividends. We’re always seeking to improve how we serve our customers, execute our projects and manage our operating costs. We ask our folks to focus on making tomorrow just a little bit better. We tell employees that while we face challenges as an industry, the work you are doing matters. 

MIDSTREAM: We’ve begun a new decade; do you have any projections for the next 10 years? 

SAILOR: First of all, I would tell you that in this industry, even five years is an eternity. Things change that rapidly in this business, and it’s hard to make predictions. But I do think there are some challenges that we, as an industry, need to recognize. 

We’re not attracting as much young talent into the energy space as we need. We need to continually think, how do we attract this talent? Because when I think about this business, it’s fast-paced, it is technology-driven. There are a lot of opportunities for folks who want to take a little risk. All of these things, I think, are what a younger workforce is looking for, and they’re here in energy. 

I think that we’re going to see some consolidation, we just have to. I think you will see some of the smaller players get together and cut costs. Hopefully, that will be a catalyst for some of the money on the sidelines to enter the space. 

And then we’ve got to continually focus on ESG [environmental, social and governance]. We didn’t hear that term as much two years ago, and now we consistently hear that ESG is important to investors. I think we do a great job as an industry producing and transporting hydrocarbons in a safe and responsible manner, and I think energy is the engine that continues to run this economy. We can’t lose sight of that, and we need to be sure we’re telling our story. We live in the same communities where we operate, and safety and the environment are incredibly important. 

MIDSTREAM: To follow on your comments about attracting talent, suppose someone new to the industry, just out of college, came to you for advice. What would you say? 

SAILOR: I would say look, I think there are a lot of opportunities in energy. Just look at the things that I’ve been able to work on in my career—commercial projects, financing projects. I got to travel the world. There is an entrepreneurial spirit in energy; it is not an environment where you can just come in and sit still. It is constantly moving, which creates opportunities to grow. 

I’ve always found there’s never a dull moment in energy. There may be some frustrating times, but the good times will far outweigh any frustration you might feel with the cyclical nature of this business. It’s been a great career for me. Coming to energy, you won’t be bored. It changes every single day. If you embrace change, you will find a very rewarding career in energy.