Oil & Gas 360
August 4, 2016 — Subsidiaries of EnLink Midstream (ticker: ENLK) and private equity fund NGP Natural Resources XI, L.P. have formed a strategic joint venture to operate and expand EnLink’s natural gas, natural gas liquids, and crude oil midstream assets in the Delaware Basin.
The NGP/EnLink joint venture will deliver expanded midstream services to producers in the Delaware basin. The new asset expansion, known as Lobo II, will include the installation of a cryogenic natural gas processing facility with capacity up to 120 million cubic feet per day and associated natural gas and liquids gathering pipeline infrastructure in Loving County, Texas, and Eddy and Lea counties, New Mexico.
ENLK will serve as the JV’s managing member and will handle day-to-day construction and operation of the assets, which are supported by long-term, fee-based commitments from major producers, whom NGP said it was not at liberty to name, as the contracts are private. EnLink said it expects the new assets to be operational by year-end 2016.
The joint venture is initially owned 50.1 percent by ENLK and 49.9 percent by NGP.
ENLK contributed approximately $230 million of existing Delaware Basin assets to the joint venture and committed an additional approximately $285 million in capital to fund potential future development projects and potential acquisitions.
NGP committed an aggregate of approximately $400 million of capital, including an initial contribution of approximately $115 million which was distributed to reimburse ENLK for capital spent to date on existing assets and ongoing projects.
EnLink retains future options to acquire NGP’s interest in the joint venture, starting in 2021.
The Lobo System
The companies said the expansion builds off ENLK’s existing Lobo System, a gathering and processing system it acquired from Matador Resources in October 2015, which ENLK contributed to the newly formed joint venture with NGP.
EnLink described the original Lobo assets in a Sept. 2015 EnLink press release, when it acquired the assets less than a year ago:
“The Delaware Basin System is located in Loving County, Texas, an area with robust drilling activity, strong well results and significant stacked pay potential. The Delaware Basin System’s assets include a cryogenic gas processing plant with approximately 35 million cubic feet per day (MMcf/d) of inlet capacity and approximately 6 miles of high-pressure gathering pipeline, which connects a Matador-owned low-pressure gathering system to the processing plant. Matador will be the largest customer on the system and will dedicate approximately 11,000 gross acres currently under development pursuant to a 15-year, fixed-fee gathering and processing agreement. The Delaware Basin System has current inlet volumes of approximately 19 MMcf/d with two rigs currently running on the dedicated acreage.”
Upon completion of Lobo II, the expanded facility will have a total processing capacity of approximately 155 MMcf/d in the Delaware Basin, the companies said.
Dallas-based EnLink Midstream’s total assets include approximately 10,000 miles of gathering and transportation pipelines, and 19 processing plants with approximately 3.9 billion cubic feet per day of processing capacity. The company also operates fractionators, barge and oil terminals, storage facilities and other midstream assets. EnLink Midstream is publicly traded through two entities: EnLink Midstream, LLC (ticker: ENLC), the general partner entity, and EnLink Midstream Partners, LP (ticker: ENLK), a master limited partnership.
NGP is a Dallas-based private equity firm in the natural resources industry with approximately $17 billion of cumulative equity commitments organized to make strategic investments in the energy and natural resources sectors. NGP has invested in more than 300 transactions with more than 190 companies throughout the energy sector and has been the catalyst for some of the largest recapitalizations and merger transactions in the industry. NGP was founded in 1988.
Oil & Gas 360® spoke with NGP Managing Partner Tony Weber about NGP’s latest midstream investment, the JV with EnLink Midstream.
OIL & GAS 360®: Why did NGP invest in this particular asset?
TONY WEBER: It’s one of the hottest plays in North America. That area is one of about a dozen counties in North America where even at these commodity prices you can still make good money drilling wells.
We have several portfolio companies that are active in the Permian basin and particularly active on the Delaware side of the Permian basin. So we’re very familiar with the economics, and we’re familiar with the geology. We want to be investors there, and we want to make money both on the midstream and on the upstream side.
OAG360: Are you also looking at investments on the upstream side in the Permian basin?
TW: Absolutely. We are keenly focused on both the Midland side of the basin and the Delaware side of the Permian basin, and have a number of teams and have had for decades out there. We have a high conviction that it will continue to be a real high quality play that generates good returns for our funds down the road.
OAG360: What is NGP’s outlook on prices for natural gas liquids?
TW: We don’t have a stated outlook on where we think oil, liquids, or gas prices will be in even the near term or the medium term. We don’t underwrite based on commodity prices.
I just think every day you look at an acquisition or at a project, and you have to expose capital and try to generate a positive return and a profit—you have to use the cards you’re dealt. So if prices are up $2-$3-$4 or they’re up 20-30-40 cents then lock it in, hedge your investment. You preserve your capital and you provide cash flow you can grow the company on. And that’s always been our take on the business, rather than trying to guess whether or not oil prices are going to go up or if liquids prices are going to go down. Just take what you’re given and structure it into the way you underwrite those investments.
OAG360: Why did you choose to partner with EnLink, rather than a different midstream company in the Delaware?
TW: Because of the long term relationship that we have with the senior management team there. We’ve known Barry Davis [president and CEO of EnLink Midstream] for 25 years, and we think highly of that firm. We think those assets are in the right place, and it comes at a time when they would value a partner like us. So over the last several months things started to progress, and we ended up looking at this project together, and now we’re going to be able to do something, so we’re excited about that.
EnLink Midstream Management Team (left to right): STEVE J. HOPPE, EVP, president of Gas Gathering, Processing and Transportation Business; MICHAEL J. GARBERDING, EVP, CFO; BARRY E. DAVIS, President and CEO; and MCMILLAN (MAC) HUMMEL, EVP and president of Natural Gas Liquids and Crude Oil Business
It’s really the high quality nature of Barry Davis and Mike Garberding [EnLink Midstream CFO] and the team at EnLink that gives us the confidence we need to make an investment like this. We are always sponsors of and partners with management teams that provide all the technical savvy and knowhow for all the projects we invest in, and there’s no difference here—these guys are very, very accomplished, successful guys.
We’ve made other midstream and plant investments in our firm’s history, so this is kind of a continuation of that legacy. We were at the front end of Energy Transfer Partners, and a company called PennTex, which is still one of our investments. We had a company called Teak Midstream. So we’ve had a number of very successful midstream investments, and we expect this one to be just like those. We’ve always been active investors in the midstream space, but we’re picky when it comes to the guys that we partner with; and these guys are very easy to get comfortable with.
OAG360: I know you like the Delaware, the Permian, but thinking about other basins, what’s the next rung on the ladder?
TW: We have a company on the oil side of the northern Eagle Ford play. That is a great area for us, we really like that. We like the Terryville field in north central Louisiana; we’ve got a company that’s focused on that. Those are both places where you can continue to drill today if you’re in the right acreage and make very good rates of return. One’s an oil play, one’s a gas play. Those are two great examples where we are investing and we have a high conviction rate.
OAG360: Do people think of NGP as having more of an upstream focus?
TW: By number, more of our investments are upstream than midstream, but our legacy and our performance in the midstream sector has been very good. Those three I mentioned were terrific investments. We like that space; it’s a good place to invest money.
OAG360: What drives the decision to make a midstream investment?
TW: Two things: number one, we’re always going to partner with a management team, so when you get the chance to go into business with somebody of this caliber you do it. The second thing is “the where.”
We have a high conviction rate around the Delaware basin. It’s based on our successful experience with upstream companies out there that we’ve owned over time and continue to own today. And we’re just believers in that basin as a place where you can still make money even though commodities prices have dropped. With technology advances, the quality of the rock out there, that is a really good play.
OAG360: How low can prices go and people still make money?
TW: I think we’re low enough!
We’re down now to a handful of plays in America where the economics are good enough to justify drilling, and some of those counties are out in the Delaware and the Midland sides of the basin. And that’s about it. So I don’t think prices can stay this low for long.
OAG360: Oil made a $2 price swing today. How long will this volatility continue?
TW: I think volatility will continue in this industry forever.
People react to new technology advancements, they react to capital markets shifting back and forth, they react to capital becoming available to small and medium sized producers and pipeline developers. It ebbs and flows. I think it’s always going to ebb and flow.
You think about the way banks operate, investment banks, noteholders, people like that—it’s the volatility and the deals those changes generate that create the opportunity to make money. One guy thinks he’s ready to exit an area; another guy looks at it as an opportunity to invest. They have differing opinions about the quality of the rock or how they would rank their acreage versus somebody else’s or one play over the other, and that creates the opportunity.
Without the volatility there’s just no chance to make money.
The EnLink management team discussed NGP and the Delaware basin joint venture on its Q2 2016 conference call Aug. 3:
Barry Davis: I would like to be sure that everybody understands the context of kind of where we are as we looked at that joint venture. And I think for context, you have to look at that nobody has a better position in the leading growth basins in the country than we do and so an abundance of opportunities for growth.
The second thing is that we’re in a sustained down-cycle with less certainty in the capital markets than we would like. So what we wanted to do here is go ahead and open up the other avenue for capital in the joint venture with NGP.
And so, as we step into that, we also then kind of add for context that we see an abundance of opportunities in the Delaware, specifically for growth well beyond what we have communicated and what we have defined and executed on to-date.
We think that the play just gets better by the day, so tremendous opportunity for growth just from an organic standpoint. We also think that eventually, there is going to be a consolidation and there’s going to be opportunities for us to acquire other assets.
So strategically aligning with NGP, we think, brings a number of things to it, access to capital, relationships with producers and just a general industry expertise that we think will be very helpful, if you will, as we develop the Delaware.
Benjamin D. Lamb Senior VP-Finance & Corporate Development: Just to add onto that, T.J., I would just say that if we didn’t see the Delaware having the same potential for us that we have realized in the Midland Basin between 2010 and last year, we never would have started with the Lobo project. And so, what this does is, it gives us the firepower to go and aggressively pursue expansion in the Delaware because the battle for the basin is being fought right now and we see these opportunities in front of us right now. This gives us the ability to go and continue to compete.
Q: On the relationships with producer customers that NGP brings, does it come with any committed volumes from any NGP portfolio companies?
Barry Davis: One of the most attractive things for us about NGP is their level of knowledge in the Delaware, and they have the same level of excitement for it that we do and you see that in the investments that they’ve made in the Delaware Basin. So, I think that our relationship with NGP will perhaps open some doors that may be otherwise wouldn’t be open for us. But at the same time, we’re going to have to compete for all of our customers’ business just like we do every day.
Q: To go back to the Delaware JV which you’ve touched on a bit here, could you expand a bit more on the thought process as far as selling half that asset versus monetizing Howard as had been discussed at points in the past. Obviously, the Delaware asset is tremendously positioned and has great growth. Just wondering if you could walk us through the thought process.
Michael Garberding: A good question. The way to think about the Delaware is — it is as much [about] the strategy as it is the financing.
The financing is the benefit of the strategy and it goes back to what Ben said earlier on the call, which is giving us the firepower to execute on opportunities we see. We looked at a lot of alternatives, including preferred and felt that the best opportunity for us was to align ourselves with a long-term relationship, with a party that has extensive knowledge of the Delaware and a party that has extensive producer relationships in the Delaware to help us achieve that strategy.
So, to me, the financing option or the sale of 50% was the net result of achieving that strategy. So for the Howard sale, it’s something we said that likely in time we’ll do and as I said earlier, we are looking at it right now. And that’s just another area we’ll look at with regard to financing the business and it’s going to be a piece of what we think is the solution to putting capital to work in EnLink and we think a good thing.
When I think of the NGP deal, I think of it more as an advantage to develop quicker and bigger than we could probably do on our own.