Private Equity Seeks Solace in Midstream amid Oil Price Slump

Billy Lemmons, managing partner at EnCap Flatrock Midstream in San Antonio, noted that for every dollar spent in upstream investments, somewhere between 15 and 35-cents of midstream infrastructure investment is needed to support production.

“Whether there will be more acquisition opportunities out there and activity between potential sellers and buyers depends on how long and how significantly oil prices remain low,” he said.

Buy Low, Sell High

Lemmons said the firm is trying to find these next great quality teams that align with EnCap Flatrock’s philosophy and approach. EnCap Flatrock has about $4 billion in dry powder to deploy across the right opportunity sets.

He explained that some high-performing companies and compelling stories can emerge during challenging times in the market. For example, Energy Transfer Partners – now a giant in the industry – began during a time when other energy companies were failing. ETP bought a processing plant in La Grange, along with a series of other assets that helped the company grow.

“The basic elements of what we look for in a team hasn’t changed. They have to be adaptable, able to build a track record consistently through multiple industry cycles. That’s often a matter of the management teams being adaptable to where the opportunity set is moving,” he said. “Organic, greenfield dollars are slowing. A producer that owns midstream assets may be over-levered and compelled to raise cash; there might be an opportunity to buy assets from that producer.”

Lemmons said some midstream companies might be over-levered and need to divest of assets to raise capital. Other existing midstream companies may need a new partner – not just capital – to help them share risk and adapt tactics to new opportunity sets.

“Everyone knows to buy low and sell high, but you’ve got to be careful. When you say high, it’s like catching a falling knife when there is stress in the system, but it’s definitely an opportunity to do some different things,” Lemmons said. “There is still a lot of infrastructure to be built.”


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