Issue #36 | The Water Tax Men

Oilfield Water Weekly

Wednesday December 11, 2019

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.”

News Digest

Blue Is The New Green. Why Water Midstream Is A Great ESG Investment [Guest Post]

This summer on the sidelines of the Oilfield Water Industry Update, I had the pleasure of catching up with Jim Summers, CEO of H2O Midstream, to compare notes. As we chatted, I quickly realized that he was about to do it again. He’s gotten ahead of another big theme that will factor heavily into the oilfield water conversation going forward. This time it’s ESG where Jim is focused on creating awareness...

Chevron's 2020 US Upstream Budget Is Flat Y/Y, But Permian Spend Is Budgeted Up 11%

The Major operator announced a US Upstream budget of $7.6bn yesterday, which is in line with 2019 spending. Permian is allocated $4bn for unconventional development (which compares to about $3.6bn this year)...

Ranking E&P RIF Risk With A New Staff Efficiency Benchmark Chart [Free Trial To Read]

E&P capital has been scrutinized six ways from Sunday for years. But what about human capital efficiency? How efficient are E&P staffing levels relative to their asset portfolios and investment programs? Infill Thinking has launched a new benchmark study on 40 operators that reveals which E&Ps are running lean vs. inflated payrolls...

Later This Week: Water Midstream Firms Take Their Investment Case To Wall Street In An Unprecedented Way [Link To Listen]

Two pure play water midstream companies will be featured at the 18th annual Wells Fargo Midstream and Utility Symposium to be held in New York on December 11-12, 2019. Historically, this conference has focused on public energy midstream and utility companies only. You can listen by following this link...

Gravity Completes Acquisition Of On Point, Creating The Largest Commercial Saltwater Disposal Company In The Midland Basin

Gravity now owns and manages more than 50 active saltwater disposal wells with more than 1 million barrels per day of permitted disposal capacity.

The Oilfield Water Tax Men – What Does It Mean To Be Water Midstream? [Free Trial To Read]

Simplistically, if the oilfield water management / operator partnership is fully developed, the water company evolves to becomes the “tax man” on every barrel of oil produced from the acreage after the development cycle is complete…“

Baker HPump™ Set To Make Waves In The Permian

Check out the HPump™ surface pumping systems inventory ready for immediate installation...

Turn The Page: Antero Midstream Releases New Outlook With No Mention Of Failed Clearwater Facility...

Antero Midstream's new outlook investor relations deck released this week does include any mention of the Clearwater Facility. The deck does promise to reduce produced water costs by $6/bbl

The More Things Change, The More They Stay The Same… [Free Trial To Read]

Rig count’s down big this year. How has that impacted the rig count mix by basin?

Williams County Denies Landfill Request To Accept Radioactive Waste, Imposes Yearlong Moratorium

Williams County commissioners have denied an amended conditional use permit for a landfill seeking to become the first in North Dakota to handle radioactive oilfield waste.

Milestone Open House Today!

Milestone is hosting an Open House on Wednesday, Dec 11, to celebrate the new landfill capabilities at our Orla facility from 11am to 7pm...

O&G Another Piece In New Mexico’s Water Puzzle [Albuquerque Journal]

“Fresh water for sale” signs dot the nearby highway as trucks loaded with water tanks speed past...

New Mexico Debates Safety Of Produced Water [Public News Service]

What is known as "produced water" from oil and gas development in New Mexico will total more than 40 billion gallons this year, and many would like to see it treated and used in place of water from aquifers or surface water. Some residents fear that water from fracking could have negative effects on human health and the environment.

Jones / Revolution Resources $200mm Merger Agreement

Jones Energy II, Inc. announced last week that it has entered into a definitive merger agreement to be acquired by an affiliate of Mountain Capital Partners, LP (Revolution Resources) in an all-cash transaction valued at approximately $201.5 million...

Oklahoma Local Press: EPA May Allow Disposal Of Oil Waste In Waterways

Within a year, Oklahoma could get approval from EPA to start issuing permits that will allow the oil industry to dispose of briny oil field waste in waterways, alarming environmentalists and making it the first of three southwestern states to step into a thorny regulatory landscape closely watched by the industry....

Opportunity: Does Argentina Need US Water Midstream Expertise In The Vaca Muerta Shale?

As this article says: "there is no transport infrastructure developed around it for the supply of key materials such as frac sand and water for drilling. Having to bring in sand and water from sometimes significant distances raises production costs to sometimes unacceptable levels, slowing down the development of the oil and gas resources in the play..."

Argentina’s Vaca Muerta Could Lead To A Shale Boom To Rival The United States

We find ourselves in the tough situation of looking for rational reasons to be optimistic about the future of Argentina, and among the eternal potentialities of this troubled land is its opportunity in the energy sector....

TROUBLE IN SHALE: FTS Investors, Including Temasek Holdings, Looking To Exit?

This prospectus relates to the offer and sale, from time to time, of up to 76,396,159 shares of common stock of FTS International, Inc. by the selling stockholders identified in this prospectus, or their permitted transferees, including a subsidiary of Temasek Holdings that lists 38% of the company's stock in the prospectus...

TROUBLE IN SHALE: Another Frac Outfit Completely Shutting Down? [Free Trial To Read]

Last Friday morning, industry sources suggested that a well known frac company may be completely closing up shop, rolling up operations, selling their horsepower, and letting everyone go....

TROUBLE IN SHALE: Enservco Receives Letter of Non-Compliance from NYSE

Enservco provides a wide range of oilfield services, including hot oiling, acidizing, frac water heating, water transfer and related service

In Water News Beyond The Patch.... Why Michael Burry Of "The Big Short" Is Investing In Water

This may seem surprising. But the Western world is slowly drinking itself dry. Think of a cup of coffee. A delicious cup of Joe requires 140 litres of water to travel from bush to table. That’s nothing compared to beef though, which requires 15,415 litres per kg[1], about the same as a single T-bone steak. Or if you flip it around, it takes roughly the water from two Olympic swimming pools to produce the meat from just one (largish) cow....

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