3 December 2019
Financial perspectives on the future of the midstream sector
According to a panel of experts at a recent Produced Water Society workshop, private capital could be the key to overcoming the financial issues in this area of the water industry.
During a panel moderated by Baker Institute energy fellow Gabe Collins, attendees of the “Financing the Future of the Water Midstream” workshop heard from financial market representatives about how sector funding will evolve. The panelists were Pete Bowden of Jefferies, Steve Cole of Five Point Energy, Suresh Vasan of Lazard, Paul Hobby of Genesis Park and James West of Evercore.
The panelists agreed that a major challenge facing the water midstream space over the next 12-18 months was financing, especially given that traditional sources, such as public equity and debt markets, were closed to the energy industry for various reasons. Regardless, there is an abundance of private capital that could be deployed in the sector under the right circumstances.
According to Bowden, the Permian Basin water midstream sector alone could see $16 billion more in incremental investments. “I tend to believe that because it's an essential service and […] because we're going to continue to produce out of the Permian, notwithstanding low oil prices, that more and more private capital will in time gravitate towards this space,” he told the audience.
As water midstream companies scale up, their investment needs will change which will create an opportunity for more mature forms of capital – such as sovereign wealth funds – to increasingly invest in the sector, Vasan said. Bowden added that those types of investors would be looking at de-risked companies with large infrastructure networks and multi-year contracts.
Cole noted that the development cycle for water midstream players has been significantly compressed. “Now, in just a couple years you can grow a water midstream business from basically a startup looking at greenfield projects into a multi-billion-dollar operation,” he said. “The opportunities are certainly out there. We are seeing new capital come into the market today from a variety of sources, from different types of institutional investors and from around the globe.”
The panel also discussed whether the recent high valuations of water assets were sustainable, especially given that produced water is not currently considered a commodity. West asserted that the sector is seeing a massive growth cycle, so the recent valuations are reasonable. “Will they converge with traditional midstream asset valuations over time? Absolutely, they should,” he said. “There will be a market for produced water over time; it'll be tradable.”
Bowden explained that the prices paid for water assets today are much smaller than what purchasers think they will be in the coming years. “The reason water valuations have been higher than G&P [gathering and processing] valuations in the current market is the perception of more growth,” he told the audience.
The panelists also discussed the challenges that must be addressed before practices such as recycling and beneficial reuse can start to attract investors. Some of those hurdles include treatment costs, the logistics of moving produced water to areas of need beyond the oilfield and finding markets that could absorb large water volumes at the right price.
Several panelists agreed that current disposal practices and some oilfield recycling would continue to appeal to investors despite the desires of some industry players and regulators for higher recycling rates and beneficial reuse options.
Vasan said that, even with all the innovation to bring down treatment and recycling costs, disposing of produced water is still the most economical option. The infrastructural systems are already in place to provide disposal, whereas new water technologies will come with some risk making it difficult to compete for capital.