T Steven B. Huckaby is chairman and CEO of Meritage Midstream Services. 42 June 2015
A crew strings pipe for a new Meritage line that will serve Powder River Basin producers. All photos courtesy of Meritage Midstream Services LLC Moving Toward Opportunities By Paul Hart, Editor-In-Chief F rom a modest, 2009 start in South Texas Eagle Ford, Denver-based Meritage Midstream Services LLC has moved on to Wyoming s expanding Powder River Basin. There s more: With a newly acquired $300 million capital investment from Riverstone Holdings LLC, Meritage is looking to create new midstream infrastructure and services in western Canada s developing Montney and Duvernay plays. Meritage CEO Steve Huckaby took time to share with Midstream Business his personal vision of a successful midstream operation and a broad vision for North America s oil and gas business. MIDSTREAM How did the Meritage partners come together to start the firm? HUCKABY In 2007, I was with Momentum Energy Group [Inc.] and coming off the sale of the company to DCP Midstream [LLC]. I knew Nick Thomas and Tim Pimmel for a while before we formed Meritage s predecessor company, Arista Midstream Services [LLC]. Before Arista, I had been competing with Nick in the Piceance Basin. We still argue about who won the Piceance battle! Even as competitors, I really liked and respected him, and it just made sense for us to get together with Tim. Now Nick is our president and COO and Tim is our senior vice president of engineering and construction. MIDSTREAM Your first project was the Escondido lean-gas gathering system in the Eagle Ford, which you sold in 2012 to Howard Energy Partners. Then Meritage moved into the Rockies and now Canada. Why the change in focus? HUCKABY The real difference between the Eagle Ford and the Rockies, or the Montney play in Canada, is simple geography. When we look at getting involved in a basin we look at a checklist of characteristics. Drilling economics is the first thing we evaluate. Are they compelling? We also ask ourselves if it is an area that we are familiar with and and have operated in with success. Then we look at the producer base. We like to see a well-capitalized, diverse and aggressive group of operators. We also look for areas where we have existing producer relationships, whether through current projects or in our past lives. It s always helpful when trust is in place because they already know us and we know them. We also want to know that the basin we re looking at is lacking in the infrastructure required to fully develop the resources that are there. Another significant key for us is a basin that has multiple horizons that are economic and can provide producers with fallback opportunities if one drilling target is not as economic as they d like. This offers a little downside protection. But in the end, as I said, a lot of the differences between plays boils down to geography. Our decision-making process is based on whether or not we think we can be successful in supporting a resource play. So far, we have been able to provide the services that producers are looking for. MIDSTREAM Meritage is moving into western Canada s Montney and Duvernay plays, which may not receive the notice of some other unconventional plays. What midstream opportunities do you see in the region? June 2015 43
The HUCKABY I agree. I don t think the Montney and the Duvernay have received the same attention that many North American plays have garnered. I think this is related to their proximity to higher-value markets and the available economic infrastructure to deliver into those markets. As long as our industry is trying to force product into the Gulf Coast from Canada and the Powder River Basin, we are going to be at the tail of the supply chain. I think we ve got to develop other markets for Canada and the Rockies, and I believe those markets lie to the west. While there are challenges getting there, we ve got to stop trying to compete with the Marcellus and the Eagle Ford for Gulf Coast markets. That just doesn t make sense. We see tremendous opportunity in the Montney and Duvernay. We just completed an anchoring deal with a Calgary-based producer. Meritage will be building a 75 million cubic feet per day 44 June 2015 gas processing plant for high-pressure gas, and we ll be putting in a crude oil gathering system just north of Edmonton an area that s looking to be a very productive Montney play. Within the Montney and Duvernay, we see opportunities to work with multiple producers to provide midstream support for horizontal production. We also think the opportunity for vertical production in this area is pretty substantial. So whether building out NGL, crude oil or natural gas infrastructure, our Calgary office is going to be busy. MIDSTREAM As Wyoming s Powder River Basin continues to evolve, how are you responding to the needs of its producers? HUCKABY We continue to see drilling activity in the Powder, albeit not at 2014 levels. We re continuing to put in new infrastructure to support the producers behind us. In this climate producers look for the ability to flow a well from the first day they can turn a well on. It s all about the economics of getting their products to market. There s no room to slip up in challenging times. So that s job one, and I think we re doing a good job of checking that box. Job two is trying to get prepared for a turnaround while we do a good job managing what we re faced with now. We were busy, and quite successful, building infrastructure in 2013 and 2014. 2015 is giving us an opportunity to optimize that infrastructure. It s allowing us to optimize our costs and, hopefully, that means we will be in a position to provide lower-cost service going forward. MIDSTREAM Your Black Thunder crude terminal in Wyoming is unusual, if not unique, because it incorporates existing rail assets of Arch Coal Inc. Do you see the potential for similar crudeby-rail operations elsewhere? HUCKABY I think so. It s not an inexpensive proposition to build a rail terminal from scratch, particularly in an
The Meritage 50 Buttes gas processing plant in Campbell County, Wyo., enjoys a backdrop provided by its namesake hills. The plant s capacity will be doubled to 140 million cubic feet per day by late this year. area where producers or marketers aren t willing to commit to spending capital on a terminal until they see a play develop a little. So we started looking for underutilized rail facilities. I ve spent a lot of time in the Powder over the years and have a long-standing relationship with Arch Coal and some of the other coal producers in the basin. Coal has certainly taken it on the chin over the last few years. It s had to compete with low natural gas prices, and I think there was a realization at Arch that they had underutilized assets they could repurpose. That turned out to be the case. I can t say I ever expected to see a marriage between a coal company and a natural gas company but you know, it s worked out very well for everyone. I believe that the opportunity to look for underutilized rail and couple it with a reasonably priced service to get outbound crude oil loaded onto rail is a winner. What we re challenged with today are the spreads between Brent and West Straight as an arrow, a new pipeline crosses the Wyoming countryside on its way to the 50 Buttes processing plant. Texas Intermediate. As a matter of fact, our terminal is idled right now because of that spread. But we re seeing the spread pop back a little bit and some opportunities to do some unique things may come soon. MIDSTREAM Where was Black Thunder crude going? HUCKABY Before we idled, we were delivering to the East Coast and to [the hub at] St. James, La. We were also preparing to move some crude to the West Coast. The Powder River barrel is a great barrel for a refinery that is used to running an Alaska North Slope barrel, which is fairly unique in its yields. Barrel-for-barrel, a Powder River barrel June 2015 45
might just be a little bit more attractive than a Bakken barrel. When the economics start to make sense again, I anticipate that we will continue to ship to both coasts with some movement down to the Gulf Coast. MIDSTREAM Meritage is considering handling produced and flowback water in Wyoming. How does that business differ from more traditional midstream functions? HUCKABY We have been promoting bundled services for crude oil, water and gas for a long time, particularly on federal lands. There has been a fiveto 10-year push to try to minimize the impact of operations on federal lands. So anytime we ve got a ditch open and we can drop another service into that same ditch, we are going to minimize impact because we re getting trucks off the road and we re doing it in one ditch. We work with private landowners in Wyoming that support the same approach and we are getting close to having water service announced and online. I m very excited about that. We had some gas flaring in a few areas and it was a big priority to put an end to that. I think we ve definitely handled that problem. Now we have the ability to dive into the other two legs of that three-legged stool; we re getting after it. MIDSTREAM Meritage has private equity commitments from Riverstone Holdings LLC, which holds a wide spectrum of investments. What is Riverstone seeking in the midstream? HUCKABY Riverstone Holdings is the largest, pure energy-related private equity fund in the country. They have a portfolio of E&P, midstream and field service firms and like having exposure across the supply chain. We re very fortunate to be one of their midstream companies. I think what attracts private equity to midstream right now is the ability to build greenfield projects that MLPs will find attractive because they add accretive cash flow. There s a market 46 June 2015 for what we build as well as the services we provide. We continue to see a real need for new infrastructure across North America. It looks like that need is going to be around for a while, so I think private equity is wise to invest in it. MIDSTREAM How can midstream operators better accommodate customers challenged by the current weak commodity price environment? HUCKABY I touched on this a little earlier when I was talking about the Powder. First, we need to clear away any impediment to getting production to market from day one so producers can move product the minute they are able to turn a well on. And to the extent that we can up our game and become more competitive offer more value and cost-effective services we need to be doing that. Producers are the lifeblood of the midstream business and anything we can do to support them is certainly something we need to look at. MIDSTREAM Do you have any personal projections on when commodity prices will start an upswing? Meritage Midstream Services LLC Highlights Founded: 2009 Substantially all assets sold to Howard Midstream Energy Partners LLC, April 2012 Meritage Midstream Services II LLC founded, July 2012 Meritage Midstream Services III LLC founded, April 2015 Headquarters: Denver Leadership: Steven B. Huckaby, chairman and CEO Nicholas O. Thomas, president and COO Nicholas Aretakis, senior vice president and CFO Richard J. Gognat, senior vice president and general counsel J. Stacy Horn, senior vice president, commercial Timothy Pimmel, senior vice president, engineering and construction HUCKABY We re eternal optimists so I truly believe that we should get a little relief at the end of this year. But while we hope for the best, we plan for the worst. We re doing everything we can do to consolidate, improve and get our costs down whatever we can do to weather the storm and help our producer base. MIDSTREAM What long-term trends do you see in the midstream? HUCKABY I believe more than ever that North America needs to come together on supply and market issues. We need to do what we can do to reach out and make things better for the producers up in Canada and do what we can do to support and supply Mexico and South American markets. There are some fundamental, bigpicture changes in the wind as to who s supplying whom on a global scale. We ve gained such unique opportunities lately to work with markets that are a little closer to home. I think our industry needs to flesh that out and make it work. Paul Hart can be reached at pdhart@hartenergy.com or 713-260-6427. Operations: Wyoming, Western Canada Key assets: Thunder Creek Gathering System, serving Wyoming s Powder River Basin, about 800 miles of high- and low-pressure pipeline Thunder Creek NGL Pipeline, interstate, common-carrier pipeline with points of origin in Wyoming s Powder River Basin 50 Buttes Natural Gas Processing Plant, Campbell County, Wyo. Buckshot Treating Facility, Converse County, Wyo. 4-43 Natural Gas Processing Plant, Campbell County, Wyo. Black Thunder Terminal, Campbell County, Wyo. Source: Meritage Midstream Services LLC