SLOW DOWN! - Five (5) Things to Consider when Evaluating a Midstream Opportunity.

I turned 32 on Tuesday, and I reflected on some shortcomings I wanted to accomplish in 2018. One of these was publishing content that was relevant in an industry I’m deeply passionate about.

You can call it free advice, but the truth behind my motivation is to stimulate a macro picture, and ultimately assist in the micro details.

Let’s get right into it. - I was recently contacted by a group out of New Mexico. (I thank them for their permission to use their context as an example) The phone call started with a simple, “Good Morning Tyler, we just purchased a midstream asset and we’re having trouble…”

Before we can even discuss the due diligence or business model of their new-found organization, the conversation typically starts down a road of opportunity, enthusiasm, and theoretical max-capacity scenarios. The glory of the “up-side”, and the bliss of not understanding what the organization has actually gotten in to.

I get it! I’m right there with the CEO, founder, financial advisor, or investor. I’m excited, I’m looking at the possibilities. I’m nodding my head, and I see the upside.

But we have to slow down, step back, and evaluate.

This opportunity, whether it’s through acquisition/divestment, greenfield capital funding, or a PE-backed joint venture, has its skeletons. It can be financial, market competition, or pre-existing environmental liability. It’s there, and hopefully it’s been vetted.

A lot can be said for a “pre” letter of intent or purchase sale agreement timeline verse an after-the-fact basis.

Don’t be that group! Do your homework, ask for help, and explore scenarios.

I’ve had the privilege of assisting eight (8) different companies with acquisitions, and four (4) organizations through the divestment of their assets. I remember my first one like it was yesterday, when I was only 26. It was eye opening and a major reason I went into business for myself.

Looking back, I can confidently say I’ve picked up a few things, and none of the transactions were the same. It’s an exciting opportunity for both organizations, but should also be respected for what the outcome can entail.

Here’s my take on five (5) things to consider when evaluating a Midstream opportunity.

1.      Why are the assets being bundled?

The group before you knew what they were doing. You have to accept this. Just as smart as you are, there’s a person with the previous owner who is just as smart.

I understand you think you can operate with a lower G&A, expand on stranded production, or you can better structure volume commitments. Likely you can do this, and do it VERY well. But if you bought an asset, bundled with “idled” or “abandoned” segments, or even a low production sister-system; you inherited a liability that the previous organization wanted to punt down the line.

I’m not saying this is a make or break, but you need to make sure you’ve done the homework to determine what this liability, asset retirement obligation, bonding, or abandonment looks like in terms of financial risk, long-term costs, and regulatory requirements.

2.      Read the fine print.

You purchased a system, and you’re excited to return to service a pipeline segment that will connect to a major storage hub. You’ve spoke with refineries and shippers, and you have the money to make it work.

Oh wait. The pipeline was “out of service” for two (2) years, and you now lost your right-of-way segment. You didn’t see this during your due diligence phase, or know to look for something that small.

While this is a tiny example, it’s another dagger in disguise. There’s additional costs, contract negotiation, and unfortunately, schedule delays.

I (we) have seen this before time and time again. Permits, ROWs, connection agreements; they all have their secrets. It’s important to review them.

3.      Is the owner really divesting because of OPEX costs?

This was true during the down turn. More divestments were popping up due to the inability to produce enough operating income, and the cost to run these assets was high.

However, this is now becoming more and more of a diamond in the rough chase. It’s not as relevant three (3) years after the great shuffling of assets began.

If someone is getting rid of it in 2018, there’s likely more to the story than just the high operating cost. I’m not saying the diamonds aren’t still out there, but there could be more to the story.

4.      Know the regulations!

You didn’t realize that gathering line was going to now fall under PHMSA jurisdiction? You didn’t know that the system needed to have a control room or integrity management plan?

Don’t fall victim to not understanding. The regulations are clear, and they are constantly evolving. Following them is relatively easy, and you can even read through proposed rules that could be forthcoming.

Have trouble sleeping on Tuesday? Pull up the regulatory website, and start reading. You’d be surprised what sticks and sparks thought.

5.      Understand your market dynamics.

Transportation is a funny industry. Oil and gas transportation is even funnier. There’s production that has no option but to go into a pipeline, and there’s volumes that are moved strictly on a commercial and marketing basis.

Understanding the dynamics of the system you’re looking at, and the surrounding market, is critical before making an investment decision. The group next door is doing the same thing, and you have to be prepared that they will move faster, out spend, under cut, and out “grind” your efforts.

Do you research before, and make sure you can stomach volatility in volumes or production.

With that said..

My final thoughts are pretty straight forward. I know the allure of a midstream opportunity. The new tariff you want to publish, the possible new connection, or the projected “mailbox” money. Slow down, do your homework, and “like” what you see. Don’t fall in love. Another opportunity is always around the corner.

Remember. No deal is better than a bad deal!