29 October 2020
Permian water midstream sector sees uptick in activity
The pace of water midstream development seems to be regaining momentum in the Permian Basin, with players taking different approaches to secure their positions.
Editor's note: This article does not include coverage of the recent 15-year acreage dedication that H2O Midstream secured with Sinclair Oil & Gas in the Midland Basin. That deal was publicized on November 3, after this article was published.
The second half of 2020 has witnessed a spate of positive Permian Basin water midstream news, and while the overall oil & gas forecast remains uncertain, the dark clouds of the downturn are beginning to dissipate for some players. Blackbuck Resources (BBR), Solaris Water Midstream, NGL Water Solutions and Breakwater Energy Partners have all reported major developments in October.
Earlier this month, BBR announced its acquisition of Cimarex Energy’s White City water infrastructure in Eddy County, New Mexico. The deal adds roughly 65 miles of pipeline and 100,000 bbl/d of installed and permitted disposal capacity to BBR’s existing platform, as well as a 15-year dedication over 40,000 acres. The acquired assets provide bilateral access to New Mexico and Texas, enhancing BBR’s operational flexibility to achieve the cheapest and most efficient disposal.
“This deal comes with a transformative increase for us in scale and reach,” BBR CEO Justin Love told WiO. “The larger the scale of your infrastructure in a consolidated area, the more competitive you can be in pricing.”
BBR and Solaris have been the only companies to acquire operator-owned water infrastructure in the Permian Basin since the oil price crash earlier this year (see timeline). However, low oil prices are expected to pressure debt-challenged E&Ps to sell underutilized assets to companies that can build out more operationally and economically efficient infrastructure networks. Near-term acquisitions are likely to go through at a discount to the high deal values seen in 2019, representing opportunities for basin’s better-positioned water midstream players.
“The overall market values are going to float with the market perception of future activity,” Solaris CEO Bill Zartler told WiO. “Valuations currently appear to be recognizing lower activity levels combined with the overall valuation of the energy markets across the board. This has resulted in lower current valuations.”
BBR is certainly keeping an eye out for new prospects, with plans to evaluate a number of opportunities over the next 12 months. Solaris, on the other hand, has no significant M&A deals in the works and is instead concentrating on adding new produced water gathering, disposal and recycling capacity.
Earlier this week, Solaris started up its 300,000-bbl/d Eddy State Complex in the New Mexico Delaware Basin. The company also plans to complete two more recycling facilities this year to bring its recycling capacity to 900,000 bbl/d across five large-scale, centralized facilities by Q1 2021.
Zartler explained that the impetus for such an aggressive stance on recycling is based on several factors. Average well laterals have expanded to 8,000-10,000 feet; recycled volumes account for an increasingly larger share of water used in new unconventional well completions; and drilling activity, which has been on the rise especially in the Delaware Basin throughout Q3, is expected to continue improving.
Breakwater, BBR, NGL have also been investing in new large-scale infrastructure in anticipation of a boost in activity among existing clients and potential new customers. In early October, Breakwater completed its 250,000-bbl/d Big Spring Recycling System, targeting Midland Basin volumes. In May, BBR commissioned its True Blue disposal facility in Culberson County, Texas. With a 100,000-bbl/d capacity, the facility is the largest of its kind in the Permian Basin.
NGL, for its part, has recently brought online its 350,000-bbl/d Poker Lake Express Pipeline, to which it plans to add more pipe to expand local takeaway capacity to 700,000 bbl/d. Aside from that large development, NGL has been occupied more with securing multiple long-term acreage dedications focused on the northern Delaware Basin.
Acreage dedications were highly prized prior to the price crash and they continue to be. However, determined water midstream companies may begin pushing harder for more sophisticated contract structures to ensure an adequate buffer against volatility in the shale patch.
“Acreage dedications are very viable and important, but through this year’s downturn, it's been very clear that it's a risky bet that may continue into the future. If you have a good counterparty and they're committing to a minimum volume, then there's downside protection there,” Love explained. He added that the minimum volume commitments BBR has won alongside acreage dedications have contributed to the company’s stability.
Though the pace of water midstream development seems to be regaining momentum, players operating in the space are not yet out of the woods. Both Love and Zartler see sector consolidation on the horizon.
“It's probably going to happen over the next year or two as the infrastructure is built out and competitive positions are solidified. Consolidation will enable additional capital efficiencies,” Zartler concluded.
Breakwater and NGL did not respond to requests for comments.