FORT WORTH, Texas—Brazos Midstream has grown its scope and scale exponentially in less than a decade. Founded as an opportunistic startup in 2015, the firm landed the “the perfect midstream starter kit” with the acquisition of Jetta Operating’s natural gas gathering system, as Stephen Luskey, chief commercial officer, describes it.
Brazos later closed on two acquisitions from Permian Basin juggernaut Diamondback Energy that added the Pecos and Mustang Springs gas gathering systems to its infrastructure base, making Brazos one of the largest privately held midstream companies in the region.
The firm’s four founding partners— Luskey; Brad Iles, CEO; William Butler, CFO;and Ryan Jaggi, COO—had all worked together in one form or another previously in the Permian before deciding to join forces. But eight years ago, they wanted to create a new story via their combined entrepreneurial leanings. And their faith in the Permian remains boundless today.
The team shared their story and plans for Brazos’ coming chapters with Hart Energy’s Deon Daugherty, Oil and Gas Investor’s editor-in-chief, this spring during a traffic jam in North Texas—which ironically accentuated another sort of infrastructure limitation in the Lone Star State.
Deon Daugherty: You’ve grown significantly in a relatively short period of time during a volatile cycle. Was high growth in the Permian part of your initial plan?
Brad Iles: In Brazos’ early days in 2015, we really didn't have the luxury of being too picky. We knew we loved the Permian Basin, and that's ultimately where we wanted to be. But initially we looked at a number of deals across the country.
The Permian was a place we kept coming back to because it’s where our past successes and relationships were, so we were obviously optimistic and hopeful that we would find an opportunity in this region.
The Delaware had been somewhat productive in the past through vertical development, but the horizontal technology had not necessarily been applied to yet. And so we uncovered an opportunity in the Delaware Basin in the early stages that wasn't without risk by any means, but we felt like it fit the criteria that we were looking for, and it was in familiar territory with all of us having worked in the Permian before. It was easy to get excited about it.
William Butler: We took a fair bit of risk early on. We got acreage dedicated to us, but there wasn't a lot of existing production associated with that. We really were stepping out and sharing in the volumetric risk with the producers on the acreage dedication contracts.
There’s no guarantees for the volumes that the midstream provider is going to get. And so it was certainly a venture capital type of risk profile initially, and we were able to start with a good acquisition of a crude gathering system from Jetta Operating, who was our upstream partner initially, and then were able to grow our gas business from there, starting with a 20,000-acre dedication that helped underwrite a 60 million cubic feet/day plant.
We've continued to earn additional business through hard work and effort and delivering on our promises to producers. That's something that I think differentiated us and helped us grow to the size of the company we are today in the Delaware.
The world is our oyster in the sense that we can go look at other assets in other basins, but it's terribly difficult to compete with the Permian Basin. That’s why we keep coming back to it; there's no better place in our minds to operate and be a gas gatherer and processor. Going forward, we think the gas growth of the Permian Basin is really going to be the story, even more so than oil growth in the future.
That was the other philosophy starting with Brazos is that we were in the oil window in the Texas Delaware by design. We wanted our underlying volumes and economics tied to the oil wellhead economics of the producers, and we were simply getting the associated gas as a byproduct versus if you go out to other areas, it's really natural gas prices that drives the wellhead economics of the producers.
DD: How did you manage the production changes during COVID?
WB: Rigs may have fallen away for a few quarters, but producers continued their completion activity. We really never saw a massive dip in our volume. We've had good steady volume growth on that asset business for the last three years, in particular. We’re growing at two-to-three times the rate of the basin.
DD: How is such growth sustainable, especially in a capital intensive sector?
WB: With over half a million acres dedicated, our contracted producers have got decades of drilling inventory remaining. We were able recently to refinance our term loan, which was put in place originally back in 2018 when Morgan Stanley Infrastructure purchased the business from Old Ironsides. That had a few years of maturity left on it, but we found a window in the capital markets back in February and we'd recently got upgrades from the ratings agencies based on our strong financial performance. So we took that opportunity when the markets were conducive to refinance that term loan for another seven years.
That's an $800 million term loan; it was $900 million originally, but we are reducing the size of it somewhat because we have free cash flow to pay down debt today. And then we also have a $150 million undrawn revolving credit facility on top of that. The business is generating free cash flow, and we will continue to do that going forward. So we view the Brazos Delaware business as being in a very enviable position and on very solid financial footing.
BI: As I reflect over our success and how we got to where we are … a large percentage of our team has worked in the upstream business prior to Brazos, and I think that producer mindset is deeply ingrained in us as a company.
In today's world, a lot of the midstream companies really enjoy the processing business, but unfortunately they don't necessarily like the difficult work of getting connected back to individual wellheads and providing field compression services as well. We want to do the hard work.
We don't hesitate to build system expansions or set standby compression. We're in the business of ensuring our customers move their gas all the time. Our philosophy is really not to ever lose sight of that even when times get difficult.
And, we see an opportunity to apply that same mindset in the Midland Basin. So we are building a 200 MMcf/d processing plant that will be operational in 2024. We see a need over there that is similar to what we have been successful doing in the Delaware.
DD: It seems that Brazos saw the opportunity to grow Permian capacity before the general panic regarding the disparity between gas volumes from associated gas and infrastructure availability.
BI: One of the unique things about these basins is the gas production seems to increase over the life of a well relative to oil volumes. So particularly in the Midland, things are pretty short from a capacity standpoint. There's a ton of infrastructure planned that is currently being built and executed. But we don't necessarily see that as a short-term problem; this is really a long-term problem that requires a lot more infrastructure.
Midstream operators in the Delaware have done a pretty good job to date of building out in front of capacity needs, but we anticipate that will become a problem in the Delaware in the next few years. It's a more acute problem at the moment in the Midland Basin. And given the level of activity anticipated, we see it continuing to be a problem well into the future.
In the midstream space, there has been a tendency to be slow to expand, only once the volumes materialize. And in our view, that's too late for a midstream company. Our job is to stay ahead of our producer customers, and that requires taking a level of risk that not all midstream companies are comfortable with.
DD: What are the challenges—and the opportunities—of being a private midstream company? And would you consider going public?
WB: We are tremendously fortunate to have Morgan Stanley Infrastructure and Chris Ortega, who joined their team in the last few years, as our sponsor. We had a monetization event back in 2018 when they came in to own the business. We would liken that to our IPO — our opportunity to get a mark-to-market on the business and roll with it as well doing with private money.
Through the commodity downswing and COVID, they had our back the whole way. Now the business is generating substantial free cash flow, so quite frankly, we don't really need to go public. Certainly that business is now of a scale where it can go public, but we think we can also convert the Delaware platform to distribution mode.
Morgan Stanley Infrastructure is an infrastructure fund—by definition, it’s a long-term holder and it is patient capital. There is no clock ticking in anyone’s mind, so we can afford to be patient for the right market opportunity.
BI: With regard to the Delaware in particular, there will certainly come a time where it needs to be in the public markets—whether that’s Brazos taking it public or whether that's us selling some day to a strategic buyer.
The public markets have the tendency to grade your performance on a quarterly basis. There's unintended consequences of that.
For example, there have been cases where we built larger diameter pipe because we believe the long-term view of a certain acreage position or a certain area is going to be greater than what we have line of sight to today. And had we not been private, it probably would have been challenging to do that—although that was the right economic decision for the long run. Someday this business will make sense in the public hands, but it's been to our strategic advantage to remain private.
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