Private Investors Aim Their Money at Pipelines/Midstream

Pipelines and the “midstream” are the next big investment opportunities for investors—so says an article by Bloomberg.

A quick primer on the oil and gas business. Drilling for oil and gas, often referred to as exploration and production (or E&P) is what is usually called “upstream.” The term “midstream” refers to the pipelines, compressor stations and processing plants that move and refine oil and gas. “Downstream” is the distribution and marketing of oil and gas to end customers. There’s some blurring of those lines; for example, big oil refineries are usually considered downstream. But you get the idea.

Now that E&P has ramped up in many locations, pipelines to get the gas to where it needs to go is the next big push. And investors are lining up for a piece of the action:

Private-equity firms are ramping up investment in the next phase of North America’s oil and natural gas drilling boom: the estimated $40 billion in annual spending on pipelines and processing to bring the fuels to market.

Arclight Capital Partners LLC, EnCap Flatrock Midstream LP and Highstar Capital are among firms behind projects that would connect and help transform fuel from thousands of shale wells expected to be drilled this decade. Some owners, keen to quickly sell their pipeline stakes within a few years, may see 16 to 25 percent returns, said Andrea Kramer, a managing director with fund manager Hamilton Lane.

The interest in processing plants and so-called gathering pipelines that connect wells is “a new phenomenon” for private equity, said George Ball, chairman and co-chief executive officer of Edelman Financial Group Inc., the Houston-based company that manages $17 billion. “So far, it’s been a highly profitable form of investment for some of the firms.”

The new investment coincides with pipeline companies merging systems to handle more shipments, including Kinder Morgan Inc.’s $24.4 billion pending acquisition of El Paso Corp. and the bidding war that led to Energy Transfer Equity LP’s $5.4 billion Southern Union Co. purchase.

Private-equity firms are building pipeline systems even before full-scale drilling begins and the recoverable oil and gas is known, said William Lemmons, a managing partner at San Antonio, Texas-based EnCap Flatrock. Financiers with pipeline expertise and more appetite for risk have stepped in where larger investors choose to keep their money in production.*

*Washington Post/Bloomberg (Mar 27, 2012) – Private Equity Joins $40 Billion Shale Pipeline Boom: Energy