Last week’s newsletter shared the first round of results from an impromptu anonymous survey that asked prominent executives the question: “what qualifies a water management firm as water midstream?”

This is part two…. After we sent the newsletter a week ago, four additional responses found their way into our inbox.

So before today’s news digest, we put the spotlight on the following informed perspectives, starting with a great analogy: the outsourced oilfield water management trend is ushering in new tax on every barrel produced (with water midstream firms being the tax collectors). If all goes smoothly, it’s a tax that operators will be very happy to pay water midstream firms in this new era of capital discipline.

Here’s that response and three other great ones, from C-level executives, on what it takes to be valued and respected as a true water midstream outfit:

• Permian water midstream CEO: “I wish I had patented “Water Midstream” five years ago (when I first closed on our transaction) and defended its proper use. It is now one of the most abused phrases in the energy sector. In the traditional sense, Midstream is logistics, but our sector moves way beyond logistics. In fact, our sector should really be referred to as Oil Field Water Management (OFWM). A true OFWM company is a partner of the operator. The partnership begins by sourcing and supplying drilling water, source water (or Frac Water), often including recycling and evolving to the disposal of produced water, which includes taking ownership of the risks associated with this byproduct of oil production. The proverbial round trip is complicated and companies that can perform should be rewarded accordingly. As such, (if we simplistically assume operations in one basin with one operator) my suggestion is that the OFWM company should be graded on how deeply integrated they are into their customers’ business and value should reflect the customers’ multiple while the acreage is in development mode and given additional credit for the very long-term value of providing contracted disposal services. Simplistically, if the partnership is fully developed, the OFWM company evolves to becomes the “tax man” on every barrel of oil produced from the acreage after the development cycle is complete…“

• Permian water midstream CEO:  “In order to be considered a true Water Midstream firm and deserving of the higher midstream multiple you need to have at least the following “mandatory” characteristic and preferably all of the next three “optional” characteristics too.
  1. (mandatory) – Long Term Dedications or guaranteed contractual revenue that is capable of underwriting large scale infrastructure projects. Long term >= 10 years in length. Large scale = catchment area spanning multiple counties or basins.
  2. (preferable) – ESG/HSE policies and procedures that are practiced throughout the entire organization that reflect a similar size and structure to their target Dedication partners.
  3. (preferable) – One of their most important values should be Innovation. We are still in the very early stages of this sector’s development. Firms that aren’t continually making the effort to evolve with their peers and partners should ultimately receive a lower multiple because they will likely miss the next creative concept that the innovative leaders are constantly trying to develop.
  4. (preferable) – Hyper focus on data analysis and risk management. Firms must know their investors boundaries and make sure they are constantly consuming data and evolving their analysis and methodology to reflect any changes and understand how it may affect their investment. Teams and investors need to know when it’s better to say no and to a deal they desperately want if it falls below their risk/reward threshold.
  In short form. A firm that would like to receive the “Water Midstream” title and valuation multiple should be hyper focused on data/analysis, ESG, Innovation and at a bare minimum have long term dedications or contracts that are capable of underwriting large scale infrastructure projects.”

• Water Midstream Legal Eagle: “Midstream firms are going to be characterized by longer contracts and the operator taking the drilling risk over based on acreage dedication. Here is a way to look at it, in the “Midstream” model: i) Dedication provides some measure of protection for Operator’s capital, ii) Customer is “captive” and to the extent that Customer’s drilling program is active, Operator has some assurance of recovery of and on capital, iii) In some instances Customer is subject to a minimum volume or “take or pay” which provides Operator with levelized revenue stream, and iv) Project finance pricing model, e.g. P = FP + VC, where FP = capital cost, including IRR + fixed O&M, and VC = variable O&M, fuel.”

• Midstream Investment Banking MD: “Biggest differentiators are contracts and sustainability/predictability of cash flow. Midstream water companies tend to be tied to production while service water companies tend to be more dependent on drilling activity levels.”