Michael Dunkel, a member of the PWS board of directors, contemplates the impacts of the pandemic-related oil price crash on the water midstream sector.
It is an understatement to say that COVID-19 changed our world this year, including the oil & gas business. But, has the oil price turmoil changed the water midstream subsector that has been growing in recent years? I consider myself a water midstream “outsider” since I am not employed by a midstream company, but I have been working indirectly for and around this developing energy segment. I have had regular discussions with midstream vice-presidents and CEOs about how they see business. I have also worked as a consultant for financial and water midstream companies on a variety of projects and acquisitions in recent years. This gives me a somewhat independent vantage point to assess the evolution of water management. To look to the future of the water midstream, I will start with the past. Starting in 2011 and 2012, I was part of Pioneer Natural Resources’ efforts to plan and execute a large water pipeline system in the Midland Basin. It was clear that the most effective way to move water around and capitalize on saltwater disposal wells (SWDs) and recycling facilities was to have a large, linked water system. Today, Pioneer’s system covers most of five or six counties and is the largest water system operated by a producer. The alternative at the time was to drill an SWD at every new well location or tank battery. Of course, in recent years, many other producers have built water pipeline systems in their core areas. Typically, their systems are either exclusively or primarily for their own use. Even the small producers like SM Energy and Approach Resources built water systems. Additionally, water midstream companies began to build multi-company systems that offered the potential to create generally larger and more efficient pipeline and SWD networks. Financial pressure on upstream producers began a trend to sell their water systems to midstream companies and replace a capitalized investment with an operating cost. These sales generated cash for producers and allowed them to drill more oil wells. Then the oil price crash of 2020 hit the upstream sector and, predictably, the rig count has fallen precipitously. This leads back to the question about what lies ahead for water midstream. I believe that midstream’s future remains bright. The key assumptions are:
- Water midstream has proven itself a reliable partner for upstream.
- Oil & gas prices will remain strong enough over the next 10 years to allow ongoing drilling in the Permian and other basins for the foreseeable future.
- The efficiencies of large water systems smooth out local water production peaks and allow more efficient use of capital resources.
- Financial pressures on upstream producers will remain and capital expenditures will be limited.
I also see continuing trends in the water midstream:
- Some producers will continue to grow their systems, and many will be sold to water midstream companies.
- Water midstream companies will grow their water pipeline and SWD systems via acquisitions and new greenfield investments.
- Private equity and other financial firms will support the continued water consolidation, based on numerous recent conversations.
- Basins other than the Permian will grow their water midstream sub-sectors.
Yes, I am bullish on water midstream, in spite of the volatility this year!