Zach Lee is on his second start-up with Gil Burciaga, a founding member of Dynegy (formerly Natural Gas Clearinghouse). They launched their first co-venture, Asset Risk Management, in 2004, to provide active hedging management for E&Ps—an unfilled niche.

“No-one out there serves in the same capacity as does ARM for the producer segment,” says Lee. “Where we are a bit different is in Qour ability to actively manage the hedge portfolios with these companies. We’ve been very successful in our ability to not only increase the price level of their protection, but also ensure they are in a position to take advantage of higher prices.”

The idea for ARM took hold when Burciaga asked Lee, who was heading up the derivatives and fixed-price desk at Duke Energy Trading & Marketing, to devise a risk-management plan for a small E&P in which he held an equity interest. Today, some 40 companies—half of them public, half private—are clients.

Five years later, the two successfully negotiated the financial doldrums of 2009 to secure capital from private-equity funder Metalmark Capital and debt financing from Amegy Bank to launch their next business: owning and operating midstream assets. The company, US Infrastructure LP, closed on its first acquisition this past November, paying Gastar Exploration Ltd. $27.5 million for the Deep Bossier-focused Hilltop Resort Gathering System in Robertson and Leon counties, Texas.

At press time, USI was closing on gathering assets with expansion opportunities in the red-hot Marcellus shale play, in Tioga County, Pennsylvania. The two deals establish beachheads for the company to acquire additional assets.

Lee is president of USI and CEO of ARM. Although the two are separate companies, their synergies further the value proposition for clients. As USI enlarges its footprint within the Marcellus, ARM has also expanded, opening ARM Appalachia in Pittsburgh this past October. It is headed by another NGC veteran, Art Cipriani.

Lee earned his BS in finance from Texas A&M University. He joined Koch Trading’s crude trading group after graduation, soon moving to the natural gas side in financial derivatives. Next up was the Duke Energy stint, before he took the entrepreneurial road.

Investor: What are the opportunities in the midstream?

Lee: A lot of money is flowing into the midstream, with a number of private-equity-backed teams out there. We see two areas of interest, each with different strategies.

Our thought process is that the shale plays have a large amount of activity with a real lack of infrastructure, which private equity is able to fill through equity-backed transactions that might entail a little bit more risk than a traditional MLP might go after.

The other interest is in conventional plays. As traditional exploration companies find the money has run away from them to the shale plays, we can take on assets they have viewed as a burden. Our advantage is in maximizing the value of underutilized assets and expanding the systems, once conventional plays are back in vogue.

Investor: Why did you set your sights on the Deep Bossier?

Lee: It has the lowest break-even wellhead cost in the Lower 48. Theoretically, then, it will continue to see activity, and that’s what you want in the midstream—throughput and expansion opportunities.

Investor: What attracted you to financial derivatives?

Lee I enjoy the long-term macro aspect of hedging. When you’re speculating, if you don’t like the market, you can just get out and sit on the sidelines until you see an opportunity.
With hedging, you’re in the market every day whether you like it or not. I like that challenge.

Investor: What’s your outlook for natural gas prices?

Lee: Right now we’re very protective, shifting length from 2010 to 2011. I think 2010 is going to be very soft—with shoulder periods in the low $3s. I look for 2011 to be much better as demand continues to show a resurgence and E&Ps begin to drill based on economics, not to hold leases.

E&Ps aren’t taking their feet off the pedal in drilling. The jury’s still out on the shale plays as to whether they’re economic at these price levels, but there’s no question that the gas is there. On the other hand, there’s too much production in conventional assets that’s not economic at these prices.

Investor: You obtained financing at a difficult time.

Lee: There were some dark days. There’s nothing tougher than trying to start your own business, but also nothing more gratifying. When you have no background, no reputation, no clients, as when we launched ARM, it’s tough. My partners and I financed it ourselves initially and really believed in what we were trying to accomplish.

For USI to close a deal in November in one of the hottest plays in North America, and soon to close our second, we had to have a great team, a great asset, and a good story.