topher06 said:

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CaptnCarl said:

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There have been some really successful JVs that align the producer and shipper. Concho has had some home runs there. JVs are always an option if a producer wants the midstream firm to take on more exposure.

If the market wants more commodity price exposure, they have the opportunity with E&Ps. Midstreams has no doubt assumed it's fair share of risk. Any risk increase will come at a cost.

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Producers should just shut in production where they can until the gatherers come to the table. Oversimplifying this post of course, but gatherers have debt covenants to meet too, so turn the screws by cutting off cash flow until they're willing to compromise on pricing and accept fee fluctuation based upon local commodity prices.

The comment about management bragging about fee based contracts insulating the business is not surprising.

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And that's exactly why upstream producers that are trying to survive this market are making it a priority to reneg out of these fee based contracts. There is a need to balance the risk for the oil and gas value chain if it wants to survive as all the parts that make up the whole depend on each other.

Many midstreams are already seeing drastic cash flow variations in the for of volume reductions, even if they are fee based per barrel. They are also taking large impairment charges.

Taking the screws to midstream isn't going to fix the problem, because midstream isn't the problem.

Like you said, those guys have capital investments and debt obligations. Those services aren't free. Wink to Webster is a good example here.

topher06 said:

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CaptnCarl said:

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There have been some really successful JVs that align the producer and shipper. Concho has had some home runs there. JVs are always an option if a producer wants the midstream firm to take on more exposure.

If the market wants more commodity price exposure, they have the opportunity with E&Ps. Midstreams has no doubt assumed it's fair share of risk. Any risk increase will come at a cost.

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Producers should just shut in production where they can until the gatherers come to the table. Oversimplifying this post of course, but gatherers have debt covenants to meet too, so turn the screws by cutting off cash flow until they're willing to compromise on pricing and accept fee fluctuation based upon local commodity prices.

The comment about management bragging about fee based contracts insulating the business is not surprising.

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This is what we did in one field. We shut in wells where we could. Reducing their revenue by 40-50%. We were asking for a show of being a good partner. At least 1-2 cents on G&P. Their counter was we weren't drilling. I told them our gas net back was $1.45/mcf. They were making more money than we were on our own wells.

Killing your host won't go too long. It's a recalibration of risk to an extent. A G&P taking $1.2-1.3 a Mmbtu doesn't work long term. You're going to basically create a zombie asset until term is up.

The G&P game that Aubrey and others created was not a good fiduciary spot

I agree, but midstream isn't what is killing the host.

I'm not saying it is. They're doing a good job w poor capital allocation of which midstream contracts are one

CaptnCarl said:

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Are you willing to share that profit or return 2-4 cents when commodity prices reach a certain level?

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Yes. The best deals are made when people are completely aligned. We win and lose together. That's the concept behind the POP midstream deals. In fact some of my acquisitions have a kicker when prices reach certain levels.

Sporty Spice said:

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topher06 said:

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CaptnCarl said:

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There have been some really successful JVs that align the producer and shipper. Concho has had some home runs there. JVs are always an option if a producer wants the midstream firm to take on more exposure.

If the market wants more commodity price exposure, they have the opportunity with E&Ps. Midstreams has no doubt assumed it's fair share of risk. Any risk increase will come at a cost.

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Producers should just shut in production where they can until the gatherers come to the table. Oversimplifying this post of course, but gatherers have debt covenants to meet too, so turn the screws by cutting off cash flow until they're willing to compromise on pricing and accept fee fluctuation based upon local commodity prices.

The comment about management bragging about fee based contracts insulating the business is not surprising.

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We don't get to share on the upside, so why should we concede some of our revenue on the downside? Also, midstream companies only aim for a 10-20% return on investment, so not much room to reduce prices. There's deals in the Permian going for <$0.50/bbl to gather oil. That's ridiculously low and such a small percentage of the ~$40/bbl the E&Ps are earning. Also, if midstream had to take commodity price risk, we'd likely need to target a 20-30%+ ROI to better align risk return. Meaning higher fees to the producer. Basically, what you're saying won't work how you're wanting it to.

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This is exactly why we don't see many of these type of deals. It's a risk adjusted ROR. The midstream company is not willing to take any commodity price risk unless they lock in such high of a return that even a few downturns will won't hurt too bad. It is my opinion that an operating company must jump into the the midstream business to have control over that. I hate going into functional areas that aren't our core competencies but there's too much being lost to the midstream companies to not give it a go. That business is less complicated than an operating company.

Goose06 said:

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Comeby, I disagree. The closer a deal aligns risk the more similar the upstream and midstream returns should be. Upstream companies get 30%, 40% and sometimes higher returns. Midstream companies rarely get north of 25% and have a target return around 15-20% for a full cycle project typically. If you want a midstream company to take the same level of risk as an upstream company, you should expect them to have similar return hurdles.

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You can look at it strictly from a return perspective but the fact of the matter is midstream assets trade at a much higher multiple than operated assets. Operated assets are around a 3-4x while midstream are much higher than that.

Goose06 said:

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Comeby, I disagree. The closer a deal aligns risk the more similar the upstream and midstream returns should be. Upstream companies get 30%, 40% and sometimes higher returns. Midstream companies rarely get north of 25% and have a target return around 15-20% for a full cycle project typically. If you want a midstream company to take the same level of risk as an upstream company, you should expect them to have similar return hurdles.

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What upstream companies regularly make that kind of return? That seems really high

Comeby! said:

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CaptnCarl said:

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Are you willing to share that profit or return 2-4 cents when commodity prices reach a certain level?

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Yes. The best deals are made when people are completely aligned. We win and lose together. That's the concept behind the POP midstream deals. In fact some of my acquisitions have a kicker when prices reach certain levels.

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Except most processing deals have floor minimums that kick in during times with low commodity prices but not ceilings.

xMusashix said:

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Goose06 said:

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Comeby, I disagree. The closer a deal aligns risk the more similar the upstream and midstream returns should be. Upstream companies get 30%, 40% and sometimes higher returns. Midstream companies rarely get north of 25% and have a target return around 15-20% for a full cycle project typically. If you want a midstream company to take the same level of risk as an upstream company, you should expect them to have similar return hurdles.

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What upstream companies regularly make that kind of return? That seems really high

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Most operators don't drill a well if they think the single well returns are below 30%.

Comeby! said:

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Goose06 said:

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Comeby, I disagree. The closer a deal aligns risk the more similar the upstream and midstream returns should be. Upstream companies get 30%, 40% and sometimes higher returns. Midstream companies rarely get north of 25% and have a target return around 15-20% for a full cycle project typically. If you want a midstream company to take the same level of risk as an upstream company, you should expect them to have similar return hurdles.

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You can look at it strictly from a return perspective but the fact of the matter is midstream assets trade at a much higher multiple than operated assets. Operated assets are around a 3-4x while midstream are much higher than that.

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That is because the risk reward difference. If all of a sudden midstream deals had lots of upstream risk then their cost of capital (and therefore their return hurdles) would be much higher and they would trade at lower multiples.

Goose06 said:

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xMusashix said:

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Goose06 said:

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Comeby, I disagree. The closer a deal aligns risk the more similar the upstream and midstream returns should be. Upstream companies get 30%, 40% and sometimes higher returns. Midstream companies rarely get north of 25% and have a target return around 15-20% for a full cycle project typically. If you want a midstream company to take the same level of risk as an upstream company, you should expect them to have similar return hurdles.

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What upstream companies regularly make that kind of return? That seems really high

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Most operators don't drill a well if they think the single well returns are below 30%.

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Not true. Up until recently, many Haynesville and Permian wells weren't even running at 10% ROR. Indigo and Rockcliff still justify their economic runs using their hedged PDP volumes. You can't assign your $3 hedges to AFE's for un drilled locations, but this is exactly what they were doing. Several PE backed permian outfits were doing the same. Hedging their current production, them running AFE's at the hedged prices to make them run.

I said most. I know the sponsor that owns my company does not think you should drill an upstream well if the expected return is less than 30%. Pretty sure when I read WPX and EOG's latest investor presentation they talked about the same thing. If it's to hold acreage that has significant upside in a different commodity price environment then that is another discussion.

Agree 100%. Just not many run economically in Aries or PhdWin.

The best way to do this is to set up a midstream firm as a JV. The producer can still control the JV, but it allows capital to be raised solely for the midstream buildout. It's easier to raise capital if the midstream assets are underpinned by more than one producer. Lastly, it's cleaner to part ways with the midstream assets as a separate LLC.

Yes, it's not rocket science, but you'll want somebody heading things up with experience. PM me if you want to brainstorm. I really enjoy this part of the industry.

CaptnCarl said:

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The best way to do this is to set up a midstream firm as a JV. The producer can still control the JV, but it allows capital to be raised solely for the midstream buildout. It's easier to raise capital if the midstream assets are underpinned by more than one producer. Lastly, it's cleaner to part ways with the midstream assets as a separate LLC.

Yes, it's not rocket science, but you'll want somebody heading things up with experience. PM me if you want to brainstorm. I really enjoy this part of the industry.

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We are talking to a midstream company whose producers are for sell about this exact scenario.

Absolutely, it would be a separate entity, likely under a different GP, or at least LLC. We have an entity set up like this, as well as a mineral company. I may reach out if I have questions.

The problem with a midstream jv with a producer being the operator is getting 3rd party operators. I previously worked at TGGT earlier in my career and it was the midstream company for Exco/BG. We had 1 material 3rd party customer and that was it. And we had a massive 36" try line with 2bcf/d of capacity and it never ran over 1bcf/d. I say all that to say, if you're going to do the jv, consider giving up operatorship to the midstream company instead of having the producer maintain operatorship. Otherwise it's just a financing transaction and you won't likely achieve any other synergistic objectives.

My guess is these are the same companies filing Ch. 11. Sounds like a bad business model to me.

Goose06 said:

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The problem with a midstream jv with a producer being the operator is getting 3rd party operators. I previously worked at TGGT earlier in my career and it was the midstream company for Exco/BG. We had 1 material 3rd party customer and that was it. And we had a massive 36" try line with 2bcf/d of capacity and it never ran over 1bcf/d. I say all that to say, if you're going to do the jv, consider giving up operatorship to the midstream company instead of having the producer maintain operatorship. Otherwise it's just a financing transaction and you won't likely achieve any other synergistic objectives.

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I was at EXCO when TGGT wasn't a separate company then and BG wasn't in the picture yet. We spun TGGT off. Very familiar with those contracts and later on JV.

Sporty Spice said:

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My guess is these are the same companies filing Ch. 11. Sounds like a bad business model to me.

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Tano's is in the same boat and have been trying to raise equity outside of Quantum.

It'll be interesting to see the long term effect of this recent collapse. I'm seeing so much money leave the industry, way more than the 2014 downturn.

yes- when you account for full cost the returns are likely less than 5% IRR and that's being generous.

Comeby! said:

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topher06 said:

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CaptnCarl said:

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There have been some really successful JVs that align the producer and shipper. Concho has had some home runs there. JVs are always an option if a producer wants the midstream firm to take on more exposure.

If the market wants more commodity price exposure, they have the opportunity with E&Ps. Midstreams has no doubt assumed it's fair share of risk. Any risk increase will come at a cost.

---

Producers should just shut in production where they can until the gatherers come to the table. Oversimplifying this post of course, but gatherers have debt covenants to meet too, so turn the screws by cutting off cash flow until they're willing to compromise on pricing and accept fee fluctuation based upon local commodity prices.

The comment about management bragging about fee based contracts insulating the business is not surprising.

---

This is what we did in one field. We shut in wells where we could. Reducing their revenue by 40-50%. We were asking for a show of being a good partner. At least 1-2 cents on G&P. Their counter was we weren't drilling. I told them our gas net back was $1.45/mcf. They were making more money than we were on our own wells.

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It is a great idea, if you don't have minimum volume commitments. They come to the table, although they'll always claim something about hurting a relationship (they don't have this issue while they are bleeding producers dry making more money on production than the producer does).

I do think midstream guys can be given some of the upside when prices improve, but need to share some downside risk when prices are in the gutter like they have been (on gas) for years.

I've had two midstream company try to work in a MVC in the negotiations in the last year. That was a very hard and direct no way.

Like I said. MVCs are making many acreage positions untenable or negative value essentially when going through 363.

Cyp0111 said:

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Like I said. MVCs are making many acreage positions untenable or negative value essentially when going through 363.

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And I'm not sure it's a fixable problem.

It's not. The G&Ps will have to decide if they restructure to make economic or just let production run off.

I think to an extent too many divergent fields were drilled without well thought out go to market plans. Problems like this when you let engineers make too many decisions.