An array of pipes and valves may not be as photogenic as a drilling mast flying the U.S. flag against the backdrop of a mountain range or the wide-open plains. Looking at a gas-processing plant doesn't rock like a thunderous frac job. But never mind that: in a hot gas market, infrastructure is cool. Savvy investors keep their eyes on the midstream because without adequate infrastructure, all oil and gas is stranded-something Hurricane Katrina has brought home to even average American consumers. The possibility of rapid growth and high returns attract them to gas-processing and -fractionating plants, gas-gathering and -pipeline systems. Just as the upstream space is now populated by executives starting over with new companies, many people starting or backing new midstream companies are alumni of midstream successes from the 1990s. The sector is ripe for large deals. At press time, midstream master limited partnership (MLP) Kinder Morgan and utility Sempra Energy announced plans to build a $3-billion pipeline linking fast-growing natural gas production in southwest Wyoming to manufacturers in Ohio. In July, a unit of Arcapita, a global investment group, acquired the majority of Falcon Gas Storage Co. and injected $100 million into the Houston firm as it expands its storage facilities in Texas. In August, MLP Targa Resources Inc. announced an agreement to buy all of Dynegy's midstream assets for $2.35 billion. The publicly held partnership started in 2003 with backing from former Tejas Gas executives and private-equity investor Warburg Pincus. That same month, three "smaller" deals were announced that total more than $1 billion. The buyers were publicly held, growing midstream partnerships: Copano Energy LLC, Crosstex Energy LP and Martin Midstream Partners. Martin Midstream Partners LP, one of the newly public MLPs, has signed a definitive agreement to acquire the outstanding general and limited partnership interests in Prism Gas Systems I LP, a gas-gathering and -processing company. Its gathering and processing assets are in East Texas and northwest Louisiana and on the Texas Gulf Coast. The total purchase price is estimated at $100 million. The selling parties include Natural Gas Partners V LP. The transaction is expected to close in this quarter. "In the past few months we have seen partnerships pay multiples well north of 10x EBITDA [earnings before interest, taxes, depreciation and amortization] for assets in some auction formats," John Freeman, an analyst for Raymond James & Associates, says in a report. Three factors are driving midstream activity: growing gas production needs additional processing and pipeline capacity; capital is plentiful and likes the midstream; and finally, by adding to takeaway capacity in supply basins, the basis differential can be overcome, helping producers get better value at the wellhead. "The market is very enthusiastic," says Crosstex Energy chief executive Barry Davis. Here's a closer look at what drove two of these recent deals. Copano-ScissorTail On August 1, Houston-based Copano Energy closed its biggest deal yet: the $495-million purchase of Tulsa-based ScissorTail Energy LLC, giving it a dominating presence in one of the Midcontinent's key unconventional gas producers, the dewatering Hunton play. ScissorTail is a high-margin gathering and processing system covering 21 counties in central and eastern Oklahoma. At closing, its estimated wellhead volumes were 140 million cubic feet per day, primarily from the Hunton oil and gas play, where it is the major gatherer, with rights to 1.3 million acres. (For more on the Hunton, see "Retro Oil," Oil and Gas Investor, August 2001.) This deal shows the potential of the midstream as both companies were growing rapidly. Since its inception in 1992 and with backing from EnCap Investments and Credit Suisse First Boston Private Equity beginning in 2001, Copano has grown via more than 25 midstream acquisitions, not including this latest one. It went public in November 2004. Copano financed the ScissorTail transaction in part with $175 million of private equity placed with institutional investors and $170 million of senior, unsecured one-year notes bought by Bank of America Securities. Copano's unique structure as a partnership in limited liability corporation (LLC) form gives it certain financial advantages when doing deals, according to John Eckel, chairman and chief executive. "Our LLC structure, without GP [general partner] splits incurred by MLPs, makes acquisitions more accretive at a given price, and is therefore attractive to institutional investors and lenders," he says. "As a result, we were able to put together balanced capital commitments, including $175 million of new equity, prior to announcing the acquisition. In addition to significant accretion for our unit-holders, ScissorTail brings Copano highly visible volume growth from the Hunton dewatering play, an attractive contract mix and an exceptional operating team." Until this ScissorTail deal added key Oklahoma assets to Copano's portfolio, it was focused solely on the Texas Gulf Coast. Copano owns the third-largest gas-processing plant in Texas, with capacity of some 700 million cubic feet per day. Privately held ScissorTail makes for an impressive growth story as well, going from zero to a market value of $500 million in five years. By the time of the sale, it had amassed eight gathering systems and 3,200 miles of pipe spanning 3,400 square miles in the Hunton play. Three processing plants had 100 million cubic feet a day of capacity tied to more than 1,600 wells. It was formed in July 2000 by a pair of longtime Denver energy investors, Jay Precourt and Fred Hamilton. To get up and running, ScissorTail bought Octagon Resources, a small midstream company based in Norman, Oklahoma. "We bought the company with EBITDA of $3 million or so that first year and then we built out a major pipeline system in Oklahoma's Hunton," says Precourt. "This year the company would have earned about $50 million and was on track to earn $80 million next year." To grow organically, midstream players count on increasing oil and gas production that needs infrastructure to be built up. ScissorTail grew right along with the Hunton. "We saw an opportunity when we bought Octagon, but the great upside was in the Hunton where there was no infrastructure," says president and chief operating officer John Raber. The firm began processing Hunton gas in the summer of 2001. The plant is expected to be at full capacity by early 2006. A key acquisition in June 2003 of gathering systems and processing plants from Duke Energy Field Services vaulted the company's pipelines from 500 to about 3,300 miles. "It's been extraordinary," says Raber. "You've had a substantial increase in prices for gas and natural gas liquids (NGLs), which encouraged much more drilling in Oklahoma and in the areas around the Duke assets we bought. We were able to hook up a lot more wells-we could do more if not for the lack of enough drilling rigs. And, most of our contracts are 'percent of proceeds,' so we share with the producer the increased value when we strip out the NGLs." ScissorTail's management is well regarded and experienced in the midstream sector. Raber was an executive under Precourt when the latter ran Tejas Gas Corp., a midstream company sold to Shell in 1998 for $2.4 billion. Now, Raber and the other key ScissorTail managers will stay around to run a new wholly owned subsidiary, Copano Energy/Rocky Mountains and Mid-Continent LLC, with ScissorTail as its initial operating unit. Crosstex-El Paso Crosstex Energy LP is also growing rapidly. In its largest acquisition yet, the Dallas-based company recently agreed to buy El Paso's gas-processing and -liquids businesses in south Louisiana for $500 million. It plans to keep those employees and hire more. "This is a huge deal that doubles the processing size of the company and approximately doubles our cash flow," says Barry Davis, Crosstex president and CEO. "We will be one of the largest pipeline operators and have the largest plant position in Louisiana." Last year Crosstex acquired Louisiana Intrastate Gas (LIG) to develop its South Louisiana position. Even more important, the El Paso assets provide Crosstex the opportunity to participate in handling growing production from the deepwater Gulf of Mexico and, longer term, the gas streams to come from expanding LNG shipments along the Gulf Coast. The acquired assets include 2 billion cubic feet (Bcf) per day of processing capacity, 66,000 barrels per day of fractionating capacity, 2.4 million barrels of underground storage facilities and 140 miles of liquids transport lines. The largest asset is a gas-processing plant with capacity of 1.2 Bcf per day at Eunice, Louisiana, northwest of Lafayette. Crosstex will finance the deal with 50% debt and 50% newly issued equity. Lehman Brothers and Banc of America Securities advised Crosstex and B of A provided a new senior secured debt facility. "Today we are in three major producing areas: South Texas, Louisiana and the Barnett Shale in Northeast Texas," says Davis. "We'd like to get into two or three more in the next few years. And we have on the boards $350 million of organic growth in new construction. "It's very simple-changes in production in certain supply basins, like the Barnett, lead to a need for a lot of infrastructure. The next bottleneck is East Texas, but we are working with Kinder Morgan on that." Kinder Morgan is building an interstate line from Carthage, Texas, to northern Louisiana that will then go south to intersect with Crosstex's LIG system in southern Louisiana that is being expanded. Current flow on LIG is 700 million cubic feet a day. Crosstex, which went public in 2002, is a bit unique in that it also operates 105 gas-treating plants in addition to processing. Its publicly traded units have zoomed from $20 then to about $90 today. What's more, its general partner went public in January 2004 at $19.50 and is now trading around $63. "It's an exciting time when I look at the landscape of the midstream business," says Davis. "There are a lot of up-and-coming companies and so many players that didn't exist before. In the 1990s you had a group of maybe 25 significant players but they all consolidated-now all those people are coming back. "There is more competition, but also more opportunity."