If we only had a dollar for every time we’ve heard the phrase “Water Midstream” this year… we’d be rich! It’s been THE hottest buzzword in all of shale during 2019.

A handful of oilfield water management companies have presented as water midstream firms pretty much since their inception (some for multiple years). Other firms with water assets that have been categorized in ‘service’, ‘technology’, or ‘in-house E&P’ buckets in the past are now rebranding and re-strategizing / re-positioning to adopt the ‘midstream’ moniker in their names or descriptions.

Even a cursory glance at trading multiples shows why. Midstream firms trade at premium valuations to pretty much everything else in the oilfield thanks to the cash flow stability inherent in the midstream model.

But what makes a given oilfield water management company worthy of transcending into the realm of midstream, which was traditionally hydrocarbon geared? What makes water firms eligible for midstream multiples that are key to so many of the produced water deals happening in the space at the moment?

Fortunately, we’ve got some of the smartest oilfield water finance folks (from C-level execs to Investment Banking MDs) on speed dial here at Oilfield Water Connection. These folks have spent many braincycles thinking about water midstream worthiness criteria this year.

So we called on a few this morning and asked each thought leader for one sentence summarizing the key characteristics they look at to determine if a given firm’s water management asset portfolio is deserving of the “water midstream” moniker. We got a bit more than we bargained for! People are passionate about this topic.

Here is feedback from 9 senior bankers, analysts, CEOs, and investors (feedback is being shared anonymously, but these are high profile business leaders in this space). There’s also a ton of news in the weekly digest below this important feedback…

• “Tenor and terms of the contract is the biggest difference. Key aspects include pipelines, multiple operators with multiple connected disposal wells.”
• “I’d say there are two key criteria to qualify… one operational, one financial. Operationally, the company must be moving produced water (no source water) over pipe. And financially, the company must have “midstream-like” contracts… MVCs and dedicated acreage.”
• “One word – ‘Contracts’. Present value of true contracted cash flow deserves a lower discount rate than spot pricing/volume exposure, which translates to a higher multiple.”
• “Term deals – 15 year contracts – on water volumes.”
• “Characteristics of water midstream – 1) long term contracts (10+ years) some sort of commitment from a producer (acreage dedication, MVC, etc) ; 2) integrated pipeline network of disposal / storage / treatment / redelivery; 3) multiple customers on a common system. Primarily, “midstream” is determined by the quality of the contracts. Quality of contracts is driven by trust producers have in the midstream provide, which requires an integrated network to deliver the reliability in a capital efficient manner. Multiple customers are necessary for risk diversification and capital efficiency (using the “white space”).”
• “I think we would call something Water Midstream if it looks like a G&P contracted business. So, SWD (not freshwater delivery – we think of that as an oil service function) – and then acreage dedications, or fee-based contracts. Anything with a central delivery point into a larger diameter pipeline for deliver to a disposal well.”
• “Our definition of water midstream assets are those which include buried pipeline infrastructure networks which move produced and other waters to be used exclusively for upstream operators supply and takeaway needs. In addition, water midstream assets include SWDs with buried pipeline networks connecting those SWDs. Finally, treatment and recycling assets (fixed and mobile), and source water wells and well field development also fall into the water midstream classification. What we do not classify as water midstream are temporary oilfield service equipment that OFS companies who predominantly or exclusively deploy above ground, such as layflat hose to stage and transfer water for fracing operations.”
• “It is all about stability of cash flows (long-term contracted revenue with credible counterparties, preferably very long-term contacts, in economic basins). Size clearly matters as well.”
• “Here are three key metrics I look at. One, the amount of dedicated acreage (50,000+ starts to confer real scale advantages, especially if it is relatively contiguous). Two, emphasis on integrated pipeline systems connecting SWDs in a way that allows the operator to shuttle water based on operational concerns. Three, strength and depth of contracts.”

And now, here is your oilfield water business news digest for the past seven days…