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Play the Game - Morphing Midstream Dealmaking into Energy Transition and 'Near Green' Opportunities

Any time there’s a step-change in technology, it presents intrepid industrialists with tremendous opportunities. Just looking at U.S. history, this has played out many times, with railroads, oil, automobiles, computers, and the internet being a few obvious examples. The Shale Revolution provided significant opportunities of its own, not just for the savviest producers but for midstreamers who jumped at the chance to develop the pipelines, gas processing plants, fractionators, and other infrastructure that was desperately needed to transport and process rapidly growing volumes of crude oil, natural gas, and NGLs. Master limited partnerships (MLPs) led the way, boosted by their advantaged access to capital, but they got an important assist from private-equity-backed developers, who were willing to take big risks in the hope of creating successful businesses. In today’s RBN blog, we continue our look at midstream dealmaking — and midstreamers’ prospective role in the coming lower-carbon economy — this time with a focus on the private equity (PE) side.

In Part 1 of this blog series, we discussed the evolution of the midstream sector over the past couple of energy economic cycles, focusing on the tremendous opportunities presented to MLPs in particular during the Shale Era. With hydrocarbon production taking off in the Bakken, the Eagle Ford, the Marcellus/Utica, and other shale basins — especially the Permian — there was an urgent need for midstream infrastructure. And midstream MLPs, with their advantaged access to capital, jumped in with two feet, and through the 2010s built out much of the infrastructure that the industry depends on today. As effective as they were, many of them grew into behemoths and their focus was increasingly on huge, multibillion-dollar deals.

That left an opening for smaller companies to get in there and exploit lucrative midstream niches. And into that void stepped another group of daring capitalists. These are the independent, usually PE-backed companies looking to get a toehold in the market, build up their business, and then flip it for a profit, often to an infrastructure fund or strategic buyer. They frequently begin with smaller-scale, greenfield developments (less than $1 billion) and often focus on gathering and processing, terminals or connecting pipelines that develop over time. Alternatively, they may be centered on legacy assets spun off by other upstream or downstream players. As we said last time, these developers are like farm teams in baseball, whereby assets with high potential are developed before being called up to the big leagues.

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