interstate pipelines, for example, have the
potential to unlock significant value as the
Northeast evolves into an export market for
natural gas. Yet, projects of this scale require
potentially uneconomic levels of capital
investment as route selection and right of
way issues in a densely populated region
add to bottom-line cost. It is imperative that
investors pay careful consideration to the
demand profile of the target market prior to
deploying capital.
Tudor, Pickering, Holt & Co. recently
performed extensive analysis on the evolution of natural gas markets in the U.S. Their
findings unveiled a number of demand
undercurrents that are beginning to drive
investment decisions.
Natural Gas: The Engine of Economy
Low-priced natural gas is bringing manufacturing and other energy-intensive industry
back to the U.S. Florida and the Gulf Coast
regions are emerging as the most likely
markets outside of the Northeast for the
huge supply of Northeastern natural gas.
Population growth in Florida is taxing existing natural gas supply and driving up prices.
Similarly, new capacity in the petrochemical
and power generation industries in the Gulf
Coast region are seen as having the capability to outstrip existing supply.
While pipelines are the logical long-term
solution to rebalancing natural gas markets
in the U.S., many producers may be hesitant
to commit production to new, relatively
high-cost routes. Therefore, the challenge for
private equity investors is identifying natural
gas pipelines and gathering systems with
optimal cost structures that will attract producer commitments. Such projects pose high
risks in the developmental stage, but provide
attractive predictable yields and lucrative
exit strategies through sale or conversion to
an MLP.
The vast new natural gas reserves are
also driving a need to develop new processing capacity across the country. Natural gas
delivered to end-users must meet certain
quality and BTU content specifications that
are closely monitored by pipeline operators.
Processing facilities extract non-methane
compounds from the raw wellhead natural
gas to meet pipeline specifications. The liquids removed are the heavier, more valuable
hydrocarbons such as propane and butanes, which are often found in raw natural
gas. These liquids are more valuable than
methane, so are removed and sold at higher
market prices. Private equity investors have
opportunities in this space by making strategic acquisitions of aging facilities for restructuring and by providing growth capital to
independent producers with growing natural
gas production.
The disruptive nature of the new shale
plays is also creating opportunities outside
of traditional pipeline projects. Railways
have emerged as a short-term solution to
delivering crude oil and natural gas liquids.
Producers are attracted to rail solutions
because volume and duration commitments
are significantly lower than most required
by pipelines. Railways also offer greater
market flexibility than pipelines as the vast
rail network in North America allows product flows to be optimally directed amidst
changing market conditions. Domestic rail
operators have experienced rapid traffic
growth over the last few years, constrained
primarily by the availability of rail cars and
the accessibility of terminals to producers.
Private equity funds have the opportunity
to benefit from rail constraints by providing growth capital to companies developing
terminal infrastructure as well as companies
manufacturing rail cars. Midstream private
equity investors have seen how these types
of investments benefit private equity funds
with shorter term investment horizons.
The midstream sector of the oil and gas
industry is clearly in a state of rapid expansion as the major shale plays across the U.S.
continue to outperform expectations. Private
equity investors have a critical position in
the market forces guiding the developmental decisions that will unlock the value of
these relatively new discoveries. Midstream
private equity investors are continuing to
support the many projects that will help unlock the economic value trapped in the vast
North American shale resources.
Thomas V. Costantino serves as the Chief Investment
Officer of Five States Energy Company, LLC and its
affiliate, Five States Energy Capital, LLC. Thomas
Edwards supports business development and marketing at Five States.
Texas CEO Magazine
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