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Win-win acquisitions in the water midstream sector

Recent acquisitions reflect changes in the water midstream sector to meet the challenge of growing produced water volumes

As exploration and production (E&P) companies focus their capital spending on drilling for hydrocarbons, midstream companies continue acquiring water assets from them and expanding their expertise to offer new services.

Though integrating these kinds of assets into their existing systems can be costly, midstream companies see advantages under certain circumstances. Acquisitions in areas where several producers are present enable midstreamers to create integrated systems of operational assets and grow their networks more quickly than if they built new infrastructure.

Referring to a recent deal with Sabalo Energy, H2O Midstream CEO Jim Summers, told Water in Oil that it also allows his company to capture additional economies of scale and offer the services it has built out to a larger number of customers.

In August, H2O bought 37 miles of pipelines, nine saltwater disposal wells (SWDs) and four Ellenburger SWD permits in Texas’ Midland Basin from Sabalo. The company also received 15-year renewable contracts to provide Sabalo with water gathering, disposal and recycling services.

“The win-win is to go and acquire the assets from the producer, take over operations, expand that to keep up with their development program over time and then bring new volume on,” Summers said.

This strategy is equally appealing in Oklahoma’s STACK play, where Lagoon Water Solutions entered into service agreements with Continental Resources and took over assets in Blaine County in July. In addition to adding SWDs, the deal contributed around 30-35% of Lagoon’s approximately 200-mile pipeline network. The expansion is in line with the company’s goal of shifting water transportation from trucks to permanent pipelines.

Lagoon also acquired a 40,000-bbl/d produced water recycling plant, which is now the state’s first such commercial facility. That asset was a significant factor in the company’s pursuit of the deal, CEO and president Kevin Lafferty told Water in Oil.

“We think our customers are going to demand, and need to demand, that the whole industry looks at and better utilizes water-based resources over time. We want to be at the forefront of that,” he said, adding that Lagoon continues to evaluate acquisition opportunities for recycling and other water midstream assets.

H2O’s deal with Sabalo also positions the company to develop its recycling services. Summers explained that the company would start with a 40,000-bbl/d rental facility, which it intends to replace with an owned asset by the end of the year. The plant’s capacity could eventually expand to 80,000 bbl/d, allowing H2O to keep up with Sabalo’s water needs, as well as connect other customers.

Both the H2O and Lagoon transactions reflect a movement within the sector towards larger-scale, better-integrated infrastructure and broader service offerings that will provide midstream companies with the flexibility needed to manage growing produced water volumes.

Summers believes water midstream companies will continue to acquire assets from producers, especially under circumstances where cash is needed and producers feel they can trust third-parties to reliably manage their water under long-term agreements.

ACQUISITIONS OF E&P WATER ASSETS BY MIDSTREAM COMPANIES IN 2019

These types of transactions are occurring across several basins and usually include at least SWDs and pipelines. The most recent transactions indicate a growing interest in water recycling.

DateAcquirorTargetAssetsLocationPayment type
AugustH2O MidstreamSabalo Energy9 SWDs, 4 Ellenburger SWD permits, and 37 miles of pipelinesNorthern Midland BasinCash
JulyLagoon Water SolutionsContinental Resources3 SWDs, pipelines and a 40,000-bbl/d recycling facilityEastern STACK play$85 million cash
JulySolaris Water MidstreamConcho Resources13 SWDs and about 40 miles of pipelinesNorthern Delaware BasinCash and equity
JulyBisonMarathon OilVarious assets to manage water in a 5.4-million-acre dedication areaSCOOP, STACK and Merge playsUndisclosed
MayWaterBridge ResourcesPDC Energy7 SWDs and 82 miles of pipelinesDelaware Basin$125 million cash
JanuaryEVX Midstream PartnersWhitewater ResourcesSWDsEagle FordUndisclosed
JanuaryWaterBridge ResourcesConcho Resources3 SWDs and about 44 miles of pipelinesSouthern Delaware BasinUndisclosed

Source: Water in Oil

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