Pipelines: Money Is There, But Where’s The Will?

PITTSBURGH—The financial capital exists to fund the big midstream buildout of Appalachia’s unconventional plays. The greater question, however, is whether the public will exists to permit construction of all the needed gathering lines, processing plants, storage tanks and transmission systems to connect the Marcellus and Utica to potential markets.

Three financial specialists contributed their viewpoints to a lively roundtable discussion entitled “Midstream and the Markets” at Hart Energy’s eighth annual Marcellus-Utica Midstream conference Jan. 25.

The panelists discussed the capital question from their differing perspectives. Ben Davis is a partner at Energy Spectrum Capital, a Dallas-based private equity firm. Rob Wilson is director of research for East Daley Capital, a financial analysis firm based in metropolitan Denver. Guillermo Sierra is managing director and head of the midstream advisory in Houston for Macquarie Capital (USA) Inc., a capital provider, commodity trader and financial advisor.

Wilson said his clients are “heavily focused on what we call tier-one plays” now due to the energy industry’s contraction. He listed those top plays as the Permian Basin, the Midcontinent’s Scoop and Stack plays and the Marcellus. “We’re seeing a lot of questions directed specifically at midstream companies. We’re advising our clients on private placements of debt, equity and, more recently, preferred equity in the Marcellus,” he said.

Davis said Energy Spectrum currently has one Marcellus investment underway with Stonehenge Energy Resources, its second project with the firm in the region. A third Marcellus project was with Laser Energy in Susquehanna County, Pa.

Looking ahead, Davis added Energy Spectrum “would love to do more in the Marcellus and Utica. We’re constantly looking for strong management teams. Ultimately, we want to meet the midstream needs of the producers.” He emphasized the importance of strong, experienced management teams in finding and funding attractive and successful projects.

Sierra told conference attendees “we live in one of the most exciting times for our industry. We, as a country, are sitting on some of the largest resources in the world… and the world needs our energy. The development of infrastructure that we expect to happen over the next several years creates a massive opportunity, the opportunity is huge,” he added.

But Sierra added the energy industry faces an important question about “how do we live and operate in a more volatile environment?” Macquarie sees “an appetite” for energy investments among investors despite the recent volatility.

The three panelists expressed concern about continuing public resistance to midstream projects that would move Marcellus and Utica production to market—particularly into New York and New England. Wilson said such opposition “is hard to model” for capital providers when analyzing a project because of the whims of environmental activists. One project may quickly receive permit approval and strong support from community leaders and landowners—while a similar project nearby quickly becomes bogged down in seemingly endless legal maneuvers and protest rallies that may drag on for years.

“Fortunately, most projects are below the radar,” Davis said, adding “there is a large need for public education” on the economic—and environmental—value of developing the two unconventional plays and their abundant natural gas reserves.

“We have to cross our fingers that we have a Trump card,” Sierra added. He noted it’s important for project leaders to work with the public and to explain “why are we doing this?” when a project starts.

Although acknowledging that opposition that has slowed Appalachia’s midstream buildout, the panel agreed that there could be a looming overcapacity situation by the end of next year.

“Toward the end of 2018 [pipeline] capacity could catch up with production and the rest of this year looks a little bit bearish,” Wilson said. At the same time midstream infrastructure is expanding, although slower than desires, drilling has slowed in the region as commodity prices have sagged. The region’s producers face significant differentials to Henry Hub gas prices and Mont Belvieu NGL prices due to Appalachia’s limited pipeline capacity.