Much has changed in the 11 years we at EnCap Flatrock Midstream have been investing on behalf of our limited partners, but today we are as optimistic about the future as ever. There is an expanding opportunity set for the private midstream-capital provider and the independent service provider.

We believe there will be a growing number of attractive acquisition and partnership opportunities. We see a strong need to move hydrocarbons from the wellhead to the water.

And talented professionals in the midstream sector agree and view partnerships with venture capital and private-equity firms as great vehicles for taking control of their futures.

Expanding Role

The rise of the independent midstream-service provider during the past 15 years has been extremely beneficial to the upstream sector and, ultimately, to downstream consumers.

For many years, we’ve said that one of the benefits of private capital in our space is playing a “farm team” role for the strategics, the MLPs. And this holds true today.

Public companies face a different set of expectations relative to predictability of earnings than private companies do. Private companies can play a vital role in sorting through both greenfield and brownfield opportunities, seasoning out risks and timelines, and building scale to a point that the opportunity is better suited for the next form of capital and/or operator.

Sometimes that’s a strategic player with a bigger balance sheet, more manpower, strategic and operational synergies, and so on.

More recently, it may mean the company is just more leverageable or attractive to an investor, like an infrastructure fund. Our long-term view is that midstream platforms of scale, with great management teams and strong balance sheets, will eventually be great fits for public investors.

Independent midstream-service providers backed by private capital are a permanent and positive force in the business. And we can’t say enough about how important our relationships are with our many friends across the industry.

Their trust and confidence are earned at every interaction we have and make a huge difference in getting deals done. This has expanded the number of investment channels for private capital.

EnCap Flatrock Midstream provides value-added growth capital to proven management teams focused on midstream-infrastructure opportunities across North America. The firm was formed in 2008 by a partnership of EnCap Investments LP and Flatrock Energy Advisors LLC.

Based in San Antonio with offices in Oklahoma City and Houston, the firm manages investment commitments of nearly $9 billion from a broad group of prestigious institutional investors.

EnCap Flatrock is the largest venture-capital firm in the U.S. focused exclusively on the midstream and is currently making commitments to new management teams from EFM Fund IV, a $3.25-billion fund.

Acquisitions, Partnerships

There has certainly been a disruption to what has been the fundamental industry model of the past 10 to 15 years. We see this as a transitional time that has opened a window for us to put more money to work in the M&A channel than what we typically see.

In the past few years, we’ve been involved in several deals that would have normally been captured by the strategics. We’ve been fortunate to have already taken a couple of those deals full cycle.

Last fall, we acquired the Centurion crude oil pipeline in the Permian Basin and the Ingleside, Texas, export terminal from Occidental Petroleum Corp. Our Lotus Midstream LLC and Moda Midstream LLC teams, respectively, are actively developing the growth potential we see on both platforms.

These deals were large at a combined $2.6 billion and really speak to the confidence Occidental had in our teams as they remain a large customer on both platforms. We are looking to do more deals like this with players that want to monetize assets and focus their capital on their core businesses.

Most recently, Nuevo Midstream Dos LLC acquired Republic Midstream LLC, a crude oil gathering, storage and intermediate-transportation system in the Eagle Ford Shale. Nuevo also plans to expand the system, through additional acquisitions or brownfield development—or both.

Transactions like these are filling a void that has developed as MLPs clean up their balance sheets and change corporate structures. There is no doubt that capital markets have cooled on the MLP space for the time being. But our long-term view is that the large strategics in the midstream space are world-class infrastructure companies that are integral to making the global economy function.

The companies and people that “move the molecules” aren’t going anywhere. But we do see venture capital and private equity filling a role on both the financing and M&A fronts until capital markets are satisfied that the industry has finished cleaning up its collective balance sheet and structure.

We also believe we will see more greenfield and brownfield partnerships between the strategics and private equity. We have always believed private capital plays an important role in the industry’s aggregate balance sheet. In many ways it is the “swing supplier” in the midstream-capital market.

EnCap Flatrock portfolio company Lotus recently entered a joint venture with industry leaders Exxon Mobil Corp. and Plains All American Pipeline LP to construct the Wink-to-Webster Pipeline from the Permian to the Texas Gulf Coast. And we recently saw our friends at Blackstone Group LP announce major deals with Targa Resources Corp. and Kinder Morgan Inc.

We believe more of these deals will happen and we’re proud that the quality of our management teams and the size of our investment platform allow us to serve and/or partner with industry leaders like ExxonMobil, Occidental and Plains.

Wellhead To Water

The Permian is still the most active basin in the country; the economics are extremely attractive. Moving hydrocarbons from the wellhead to the water is an expanding market and we believe we’ll see even more venture-capital and private-equity involvement in large capital projects.

These include large gathering systems like the Centurion Pipeline System, takeaway pipelines like Wink-to-Webster and export infrastructure at the landing zones like Moda Midstream’s Ingleside Energy Center at the Port of Corpus Christi.

Ancillary to this, but important, are projects that ensure connectivity. For example, our portfolio company Cogent Midstream LLC recently announced that it will build a 25-mile pipeline to connect its Big Lake gas-processing complex in the Midland Basin to Kinder Morgan’s Gulf Coast Express Pipeline (GCX Pipeline).

Midstream Talent

We believe our competitors and friends in venture capital and private equity will agree that these dynamics create a very positive environment for talented midstream professionals who want to take control of their futures by forming management teams and seeking growth capital.

During the past two years, we’ve backed six new companies formed by seasoned midstream professionals, including from EnLink Midstream LLC, Crestwood Equity Partners LP, Enbridge Inc. and Sunoco Logistics Partners LP/Energy Transfer LP.

The initial commitments we made to these teams exceed $1.6 billion, combined. And, in January 2018, we closed EFM Fund IV, a $3.25-billion fund to fuel the continued growth of our portfolio companies.

Things are moving fast in midstream. For example, just six short months after our initial $400-million commitment to Lotus and with our support, Lotus acquired the Centurion system in a bundled, $2.6-billion deal that included Moda’s acquisition of the Ingleside Energy Center.

Two months later, Lotus entered the previously mentioned joint venture with ExxonMobil and Plains to build the Wink-to-Webster pipeline.

As our management teams make deals and dig into new projects, the majority of our initial commitments have increased substantially.

Bill Waldrip and Billy Lemmons are co-founders and managing partners of EnCap Flatrock Midstream