When Mike Noack and Glen Harrod joined to form Tristate Midstream a decade ago, the East Texas veterans imagined they would buy up underutilized assets in unappreciated areas around the Cotton Valley play. Then the Haynesville Shale came along and greenfield buildout of high-pressure gathering systems became the opportunity of the day. Having now sold those assets for robust returns, assets in iterations two and three of Tristate more closely resemble the original vision—though the rebirth of the Haynesville and Terryville Field lurk in the wings. Noack, co-founder, president and COO of Tristate Midstream, visited with Midstream Business to discuss the company’s strategy, future opportunities and how the downturn has affected its plans.

MIDSTREAM How did Tristate come together?
NOACK Glen and I met in the past when we had gotten together for an asset in Shelby County, Texas. He was with Tom Brown and I was with Central Crude. In March of ’07 he was doing consulting work and I had since left Central Crude and was working for Cimarron Gathering up in Gainesville, Texas. We sat down at The Oceanaire restaurant in Dallas and were talking over lunch about where we had been in our careers, where we were headed, and realized that both of us were looking for a change and wanted to pursue midstream assets. We were both very integrated in East Texas through our past producer experiences.
In the course of that conversation and in the couple of months following, as we worked through the Shelby County project, we realized that we needed to start a midstream deal together.

We registered the Tristate name in May of ’07. Neither one of us being socialites, we knew we didn’t want to worry about raising money through multiple owners, so we interviewed producers to be their midstream arm to back us. We met with Energy Spectrum, which became our backer at the end of the day. We formed in October of ’07.

MIDSTREAM What was your initial strategy?
NOACK Our initial strategy was to find some small, existing, producer-owned assets that we could then grow in an area where we felt there would be future drilling activity. The initial start happened in North Louisiana. We bought a producer system with a few Cotton Valley permits around the system.

Shell and Encana were doing some exploratory Haynesville Shale vertical drilling near the system in which the results were not even a million cubic feet a day a well. We bought the system for a very reasonable price and had less than 1 million cubic feet per day (MMcf/d) on it. Within a few years we were over 100 MMcf/d thanks to successful Cotton Valley drilling and then the Haynesville.

The Haynesville drove us from being that low-volume, low-pressure provider where we could utilize existing, smaller pipe, to having to build infrastructure to accommodate these higher rated Haynesville wells where there was no infrastructure sufficient to handle those types of volumes. That infrastructure had to be built. We became a greenfield-type company in that phase of growth.

MIDSTREAM Were you prescient in forming ahead of the launch of the Haynesville Shale and selling at the peak of production?
NOACK I would love to say that we were strategic in all of that, but it was probably blind luck. We literally went into the area expecting to have a low-pressure system, doing three stages of compression, dehydration and a little bit of amine treating. Cotton Valley wells in that area of Red River and Bienville parishes [La.] have a little above pipeline spec CO2 levels. We were expecting to do a traditional producer/midstream relationship of providing those extra services.
Within six months of being there, Chesapeake Energy Corp. made their big announcement in another area of Louisiana in the Haynesville. The story was written after that. We quickly converted a low-pressure, three-phase compression system to a high-pressure, Haynesville gathering infrastructure.

MIDSTREAM Has the cap on gas prices over the past decade, resulting from those early shale gas plays, changed your strategy?
NOACK It has had an impact along the way. In 2011, when emphasis shifted to oil, we were fortunate to be able to exit the Tristate Midstream I assets. We had already sold our assets in Red River and Bienville parishes [La.] to Energy Transfer Partners, and we were fortunate—right as market prices were falling—to exit our Sabine Parish, La., Haynesville assets to Crestwood Equity Partners.

At that point we had to make a decision of what’s next. Everybody was exiting their activity in gas and shifting their emphasis to oil. We have a staff with a varied depth of experience in East Texas/North Louisiana, so we looked at that area and felt like this was a good time to buy infrastructure as people exited, to be ready for the return. Because of our non-compete in North Louisiana, we turned our eyes to East Texas and picked up some midstream assets from Forest Oil Co. that provided the starting footprint for Tristate II.

East Texas is known for its Cotton Valley and some Haynesville, but it’s also known for shallower horizons that are more oil rich. We felt like that diversification of multipay horizons would give us that flexibility to survive through the next phase of the industry, not knowing whether or how quickly gas was going to rebound, or how strong oil was going to stay.
We are now definitely seeing the emphasis back on gas. We have started an additional Tristate fund, Tristate III with Energy Spectrum, and we are working hard to grow back into North Louisiana.

MIDSTREAM Has your strategy changed?
NOACK The root of Tristate is the same, although the outward appearance might be different. A majority of our management team has spent half or more of their career on the production side drilling/completing/operating wells or marketing the gas for the producers, so we have a wide variety of production experience. We really understand what a producer needs from the midstream side.

Our other driver is that we love taking something that has been idle or not operated at full capacity or efficiency, and to come in and laser focus on an area, optimize that system and provide alternate utilities for the system. We like to think of it as being incubators of underprivileged assets. That hasn’t changed. That’s still who Tristate is and that’s how we function. We build around our existing assets by buying additional pipe around us and then building greenfield for new drills.
I would say we are now back in an environment where we are much more focused on optimization of our current assets. The slowdown in East Texas is starting to pick up, and we’re having to optimize our existing assets, to find creative ways to work with producers to consolidate compression, dehydration and improve and lower operating costs for both sides.

MIDSTREAM Where is Tristate II focused and why? What plays are you targeting?
NOACK We’re focused in Rusk and Harrison counties, Texas, for the Cotton Valley and Haynesville plays. The Cotton Valley wells provide a good mix between gas and NGLs from the condensate levels that those wells recover. With the increased lateral lengths going beyond 5,000 feet and into the 7,000-foot range, we’re seeing really nice IPs and enough NGLs in the pipe to support economics to make it worth pursuing by the producer. With the increased lateral length, the Haynesville horizon in Harrison County is starting to be a focus for several producers and the increased volumes from the longer laterals are providing the IPs necessary to make these wells economic.

MIDSTREAM What does your portfolio look like now?
NOACK Between Tristate II and III, we have just over 350 miles of pipe. We are in six counties scattered across East Texas and one parish in Louisiana. We have a little over 30 producers on our various systems. They are all low pressure, typically less than 100 pounds. They go through three stages of compression, then we deliver to other midstream assets for processing. Several of our systems have multiple processing options.

We have looked at building a processing plant in East Texas, but with the current volumes and activity, East Texas is long on processing. We don’t currently see building a plant as a growth opportunity for us, but rather the growth opportunity being to allow the producers access to as many of those processing options as possible, so they can negotiate the best contract possible for themselves and their volumes.

MIDSTREAM What kind of activity are you seeing across your East Texas portfolio?
NOACK We’re seeing Cotton Valley starting to come back. The Haynesville increased activity is not directly on our assets at this time, but permitting is getting closer. There’s some activity kicking off along the Texas-Louisiana border in Caddo Parish [La.], then definitely south of us down in Desoto Parish [La.] and Panola County [Texas]. We’re seeing permits and activity headed north in those areas. Then in western Harrison County, which falls in the proximity of our assets, drilling will be taking place in the second half of this year.

MIDSTREAM But no current drilling on your assets?
NOACK Correct.

MIDSTREAM Why do you think that is?
NOACK For us, it was just a pullback of producers on our systems due to the financial downturn. We had a few producers go through bankruptcy. They’re just coming out of those bankruptcies, getting their budgets reset, getting their drilling plans back in motion. We’re starting to see them getting ready to return to the drillbit in the latter half of ’17.

MIDSTREAM Don’t you have assets a little further west in Navarro and Freestone counties in Texas as well?
NOACK Our assets to the west are in areas that right now are not seeing much activity due to the current pricing. It’s a richer gas play, but lower volumes. It’s more of a lime play. The technology just hasn’t quite been unlocked. Several people have tried and they’re still working on how to get the frack done, to get the volume needed to make those wells economic in the current pricing environment. There are definitely proven reserves there that will be developed with the strengthening of prices.

MIDSTREAM Are you solely gathering natural gas now?
NOACK We are solely natural gas right now. We are open to doing oil gathering, and also saltwater gathering and disposal, but currently we just have natural gas lines.

MIDSTREAM You started Tristate II in 2012. Are those assets ripe for sale, or are you looking to build it into a larger entity?
NOACK Oddly enough, I would say we find ourselves caught in an environment where we are foreseeing both. They are ripe for sale; if somebody is interested in a growth expansion opportunity, we are available for acquisition. But just because our timeline is long, we do not consider ourselves to be a fire-sale entity. We see the activity around the assets increasing in the near future and do not want to prematurely rush into a sale.
However, Tristate II is mature and doesn’t have the access to capital that Tristate III does. We made our first acquisition in Tristate III in January of last year. We are looking for growth and the development opportunities there to continue to expand. We have parallel tasks going on.

MIDSTREAM What is your strategy with the North Louisiana purchase in Tristate III?
NOACK Our strategy is to grow in that area, to provide processing outlets in an area of North Louisiana—Caddo and Bossier parishes—where there have typically just been dry gas markets. We’re starting to see the connectivity of the Cotton Valley play between Terryville Field and the activity that’s been going on in East Texas. There seem to be pockets of Cotton Valley gas that is rich that could benefit from having connectivity to some of the processing options in East Texas and North Louisiana. We’ve actually been looking at some of the bigger acquisition opportunities in the East Texas area. We’ve not been successful in any of those, but we are definitely looking at and pursuing that option.

MIDSTREAM Is this a Cotton Valley play for Tristate, or are you trying to capture lightning in a bottle twice with Haynesville?
NOACK We’re looking at both. An acquisition we are working on would allow us the opportunity to hopefully catch some of the Haynesville growth as it expands north in Caddo Parish with some larger-diameter pipe. But Tristate III will bleed into Texas if there are opportunities that present themselves that do not fit in the financial structure of Tristate II.

MIDSTREAM Are you forecasting that this area is on the upswing?
NOACK Yes, we are anticipating growth in this area in both horizons, in the Haynesville and in the Cotton Valley, in the Harrison-Caddo-Bossier area.

Comstock [Resources Inc.], Chesapeake, Covey Park [Energy LLC] and Vine [Oil & Gas LP] are chasing the Haynesville opportunity, along with some others. Their main activity is down in DeSoto Parish and starting to increase activity up into Caddo, Red River and the Bienville area.

Other players are permitting wells and testing the Cotton Valley, trying to find the next Terryville and connecting it to the activity that has been proved up in Harrison County on the Texas side. Both are going on in their own fronts and in their own rights. You have players working both horizons right now.

MIDSTREAM Do you think the Gulf Coast LNG buildout will have an effect on the regional gas markets around there?
NOACK I’m definitely seeing that activity. With the close proximity of the gas in East Texas/North Louisiana to the new LNG market, it will be positioned for better pricing. That should help continue to drive the growth that is going on, and the increased rig activity that we’re seeing. Producers, especially private-equity-backed entities, are continuing to grow their position and strengthen their activity levels. To me, that’s saying they’re forecasting and seeing the stability in price, even with these increased reserves and volumes we’re getting. They’re seeing stability in pricing through increased market options and market outlets to drive this new focus area.

MIDSTREAM Do you believe the pipeline industry is at risk nationally from being targeted by hydrocarbon opposition groups?
NOACK I do not. There are always going to be activist groups that are opposing, whether it’s the oil and gas industry or other industries. I feel strongly that, at the end of the day, economics drive the trends of the United States. Our nation is highly focused on oil and gas and the resources it provides. A wide variety of industries need it to make plastics and fuel for automobiles, and other sundries for which oil and gas are useful. I do not see that going away.

We’re always going to have alternate energy sources of solar, wind, etc., but oil and gas are still prudent resources. Activists may come against it, and still economics will win in the end.

MIDSTREAM What is your current biggest challenge?
NOACK The highly competitive marketplace we are now in. It’s great for the producers. They have a lot of midstream entities out there looking for opportunities and willing to put capital to work. It’s a very good time in the industry to see all this private money being in the marketplace.

Then, secondarily, the challenge to set yourself apart, to be the provider that a producer wants to align with to do business. We feel like we’re in a good spot for that with our heavy producer background and experiences. Being small, we have the ability to be extremely flexible in our deal structures and the type of relationships we make with our producers.

MIDSTREAM Might Tristate expand beyond East Texas and North Louisiana?
NOACK We are definitely looking at opportunities. We’ve made proposals and bid on various acquisitions in the Scoop/Stack and in the Permian Basin. We keep finding ourselves in the top quartile of these deals, but we haven’t quite made it to number one yet. Hopefully there will be something around the corner soon that will take us into a new basin.

Also, we’re currently looking at some longer haul pipes to expand our horizons as one of our strategy shifts, and growing to be a bigger Tristate than we’ve traditionally been.

MIDSTREAM What is the size of your equity commitment?
NOACK In Tristate I we put approximately $50 million to work from Energy Spectrum and generated a return that was a little over two and a half times. In Tristate II we’ve got somewhere around $30 million at work. Then in Tristate III, we have a very minimal amount of capital at work right now, but we have access to $100 million from Energy Spectrum, if we can find the opportunities to utilize it.

MIDSTREAM What is your vision for Tristate?
NOACK We would like to grow Tristate III bigger than Tristate I and II have been. We would like to get more into the larger diameter pipe, start doing a larger footprint and connectivity of opportunity, look at processing if necessary, and see if we can get into a greenfield area. We have staff with experience in processing, in treating and handling gas. We’d like to put some of those skillsets back to work.

Steve Toon can be reached at stoon@hartenergy.com or 713-260-6431.