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Private equity turns to Gulf Coast exports as Permian pipeline opportunity fades

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Private equity turns to Gulf Coast exports as Permian pipeline opportunity fades

Near-term opportunities for private capital to invest in the prolific Permian Basin will lie closer to the water than to the wellhead as crude oil and NGL exports from the Gulf Coast ramp up.

Private equity managers whose firms invest in the midstream sector said the need to move abundant shale supplies out of West Texas and New Mexico, along with international demand for those products and a potential overbuild of long-haul takeaway pipelines, is shifting investment funds' appetite in the region from the gathering and transportation segments to activities further downstream.

"I don't know what someone else would want to do, but it's probably not, 'Oh, let's go get some more acreage for gathering' because the good stuff's already dedicated. It's probably not, 'Oh, let's build another crude pipe out of the Permian'. ... It's going to be something closer to ... the commodity before exporting," Blackstone Energy Partners Senior Managing Director and CEO David Foley said on the sidelines at CERAWeek by IHS Markit.

The Blackstone Group LP energy-focused business spent 2017 and 2018 amassing gathering, processing and takeaway assets in the Permian, including EagleClaw Midstream Ventures LLC, EagleClaw rival Caprock Midstream LLC and a stake in the Kinder Morgan Inc.-led Permian Highway natural gas pipeline expected to begin service in late 2020. But investment priorities change and "usually if you try to do more in the next two years of whatever was working in the last two, you're going to overpay and have not-great returns," Foley said.

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Private capital managers such as Blackstone's Foley and analysts who cover oil and gas infrastructure companies are also concerned about a glut of oil pipeline capacity. Energy investment bank Tudor Pickering Holt & Co. analyst Colton Bean said in a recent interview that there will be 6.3 million barrels per day of Permian pipeline space by the end of 2019, but that production is only expected to reach about 5.4 million bbl/d in 2021.

EnCap Flatrock Midstream managing partner and founder William Waldrip agreed that while the Permian remains a hot spot for private funds, the push to expand the midstream value chain will pull that capital in a different direction.

"One of the big things we're seeing ... is the need to move from the wellhead to the water, and so the Permian in particular is an area where ... the expanding market for commodities is the water," he said in an interview. "There's going to continue to be a need for a lot of private funding from the midstream perspective in the Permian, although it may go for a ... different kind of [project] than it has in the past."

EnCap Flatrock-backed Moda Midstream LLC, for one, bought the Oxy Ingleside Energy Center LLC crude oil and LPG export terminal from Occidental Petroleum Corp. in 2018. The port near Corpus Christi, Texas, recently completed upgrades allowing it to load very large crude carriers, or VLCCs, and plans to further increase loading rates in addition to building piping that would enable the facility to receive deliveries from three Permian crude pipelines scheduled to begin service in 2019.

"It's ... gone exceedingly well," Waldrip said about Moda Midstream's acquisition of the Ingleside port, noting continued interest from new parties in contracting its services.

Sentinel Midstream Holdings LLC, which is backed by Cresta Fund Management, is set to develop its own deepwater crude oil export facility near Freeport, Texas, that would be capable of fully loading VLCCs, the largest commonly used class of freighter in the oil trade. Investment firm Carlyle Group LP and the Port of Corpus Christi are teaming up on a proposed export terminal with a similar capacity. The Port of Corpus Christi has been working on a project with the U.S. Army Corps of Engineers to widen and deepen the Corpus Christi channel to enable the partial loading of VLCCs by 2021, but Congress has not fully funded the venture's federal share, and the project exceeds the scope that an industry-only effort could achieve.

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For now, the Louisiana Offshore Oil Port owned by MPLX LP subsidiary Marathon Pipe Line LLC, Shell Oil Co. and Valero Terminaling and Distribution Co. is the only facility in the U.S. that can handle fully loaded VLCCs. Caryle announced in January that it invested an undisclosed amount in Crimson Midstream Holdings LLC, which is developing the Swordfish crude pipeline with MPLX to connect terminal facilities in St. James, La., and Raceland, La., to the Louisiana Offshore Oil Port terminal facility in Clovelly, La.

Blackstone's Foley is also eyeing demand for Permian hydrocarbons further downstream as U.S. companies build more ethane crackers, which turn the NGL ethane into ethylene, a crucial component of plastics and other petrochemicals, after the ethane has been separated from other NGLs through fractionation. "I'm more interested frankly in some petrochemical ... things you can do with [NGLs]," he said.

Private equity is still snapping up some more traditional midstream assets outside the booming Permian. EnCap Flatrock portfolio company Nuevo Midstream Dos LLC agreed on March 20 to acquire Republic Midstream LLC, which owns a crude gathering, storage and intermediate transportation system in the Eagle Ford Shale, from an affiliate of ArcLight Capital Partners LLC, and Targa Resources Corp. agreed in February to divest a 45% stake in the entity holdings its Williston Basin assets in North Dakota to affiliates of Blackstone's Tactical Opportunities Fund.

"I think the Permian is probably a bit overheated right now. I don't think you'll see us invest in the Permian without hedging that bet to a more contrarian view," Carlyle managing director Ferris Hussein said.