(Oil & Gas Financial Journal) – By Anthony D. Andora. ASK ANY oil and gas executive, and they’ll tell you that the energy sector is not one for the faint of heart. Severe commodity-price fluctuations, boom-bust cycles and capital-intensive projects that would give Donald Trump pause, are just a few factors that could dissuade the most courageous individuals from entering the sector. But ask any oil and gas executive why they still do it and you’ll hear a similar response, “We love it.” To read more at the Oil & Gas Financial Journal, click here.
Designed and developed years before the oil and natural gas boom, Eureka Midstream now stretches more than 200 miles throughout core areas of the Marcellus and Utica Shales.
The executives at Eureka Midstream are no different. With operations in the heart of the Marcellus and Utica shale plays, the Eureka Midstream management team has successfully navigated the challenging environment. They have maintained strong utilization rates despite a slowdown in drilling activity. They have grown throughput volumes from 220,000 in November 2014 to approximately 800,000 MMbtu/d today. And they have continued to broaden and diversify their client base while other midstream operators have struggled. But like so many things in the oil and natural gas patch, it has not been easy. Designed and developed years before the oil and natural gas boom, Eureka Midstream now stretches more than 200 miles throughout core areas of the Marcellus and Utica Shales.
Previously known as Eureka Hunter Inc. and a former subsidiary of Magnum Hunter Resources (MHR), Eureka Midstream had to manage the complicated unwinding process from MHR to ensure that it was not part of the Magnum Hunter restructuring. At the same time, Magnum Hunter was also one of Eureka’s valued midstream clients.
As Chris Akers, chief operating officer of Eureka Midstream explains, managing this process was no easy task: “Magnum Hunter Resources not only owned a large portion of Eureka Midstream, but Magnum Hunter was also one of our valued clients. As such, there was a lot at stake for both parties. Magnum’s ownership interest in Eureka Midstream necessitated our success as they would clearly benefit from increase in our valuation. At the same time, we needed to unwind from Magnum Hunter and disassociate ourselves from MHR’s Chapter 11 restructuring even though the company was a valued client and a contributor of throughput volumes for Eureka Midstream. Today, Eureka Midstream is no longer part of Magnum Hunter Resources. We are a proud independent midstream operator. We have multiple clients in the largest natural gas shale in North America. That said, Magnum Hunter Resources, a virtually debt-free company having successfully emerged from its restructuring, remains one of our many valued clients.” While this accomplishment was a strong positive for Eureka Midstream, a new wrinkle soon emerged on the midstream front, a wrinkle that quickly evolved into a major issue for all midstream participants. On March 8, 2016, the US Bankruptcy Court of the Southern District of New York, handed down a decision involving Sabine Oil & Gas vs. Cheniere Energy. In the decision, the court held that midstream contracts do not run with the land and that long-term contracts are subject to change. While this ruling was a non-binding decision, it did not sit well with many midstream players. Many of the decisions that midstream industry participants make regarding large capex budgets, complex pricing models and planning assumptions are often influenced by long-term, fixed-fee contracts. As such, court rulings like the Sabine decision could have severe long-term consequences on midstream operators.
Eureka Midstream however, with its broad base of predominantly well-financed clients, multiple interconnects and 200 miles of pipeline in the heart of the Marcellus and Utica, remained undeterred. The overwhelming majority of Eureka’s clients are investment grade exploration and production companies capable of navigating the current downtown. Akers, along with his executive team, once again sat down with the team of executives at Magnum Hunter, a company that had voluntarily filed to restructure. Together, the companies worked from a platform of commonality rather than dissension and division. They focused on mutually beneficial objectives. They resolved the issues of contention. And today, they continue to work together and have a productive relationship.
Although the Sabine court decision, as well as other pending court decisions, could impact long-term, fixed-fee contracts, a potentially larger issue is a midstream operator’s ability to maintain a large well-financed client base. Midstream operators with a broad portfolio of well-financed clients are typically better positioned to navigate market downturns versus companies that are solely dependent on one or two clients.
To this extent, Eureka Midstream, is well positioned. As an independent midstream operator, Eureka’s portfolio of 14 clients is both diverse and financially strong. Nosingle producer on the system represents more than 17% of total throughput volumes. This characteristic not only helps ensure broad-based diversification, but it also helps ensure that no one producer has a disproportionate advantage within the system and provides fair and equal access to transportation. This quality is critical in a highly competitive midstream environment.
While few could deny that the Sabine court decision and MHR restructuring were significant obstacles, Akers believes that the real impediment to growth in the sector involved something much larger; reduced drilling activity. With the precipitous fall in oil and natural gas prices exploration and production companies have significantly reduced their capex budgets and scaled back drilling activity. Total rig count over the past 12-month period in the Marcellus Shale alone has dropped from 66 rigs to 26 rigs. During the same period in the Utica shale, it dropped from 24 to just 10 rigs. And nationwide, the natural gas rig count has fallen from 222 rigs to just 85, while the oil rig tally dropped from 659 to just 318, taking the combined count down to 404. That’s a level not seen in decades.
As Akers explains, “While the Sabine court decision and restructurings throughout the industry have been a challenge, the real impediment to growth and success is reduced drilling activity. Reduced drilling activity in the region impacts everything. It impacts production rates, throughput volumes and long-term development decisions and success. Midstream operators are working harder than ever to maintain high utilization rates and throughput volumes.”
Akers adds, “All this has forced us to think outside the box, to become more creative. We’re doing things today that we hadn’t thought of previously. We’re working with companies that we may have previously been viewed as competitors. We’re forming makeshift joint venture agreements to move more gas throughout the basin. And we’re working more closely with our valued clients to achieve mutually beneficial results. No doubt that today’s conditions make for a difficult operating environment, but we all know and understand that we’re in this together. And working together makes us all stronger.”
While Akers tone of unity is a common and familiar tone in today’s difficult environment, the planning and development process that went into building Eureka Midstream is not. Much of the 200-mile system, with its strategic location in the heart of the Marcellus and Utica, was acquired well before the land boom in West Virginia and Ohio. Decisions to install multiple interconnects that provide clients with increased optionality and better pricing points, were planned well in advance of implementation. And Eureka’s hybrid transportation system, a system capable of transporting both lean and rich natural gas, is in sharp contrast to many of the dedicated drive systems that were designed during Eureka’s inception. Management cites the decision to build multiple interconnects as a primary reason for the tremendous growth in throughput volumes; throughput volumes that have risen from less than 100 MMbtu/d in 2010 to more than 800 MMbtu/d today. All of these factors demonstrate Eureka’s forward thinking approach to midstream management.
That said, we still operate in a difficult environment. Reduced drilling activity, low commodity prices and shrinking margins have all conspired to create severe challenges throughout the industry. Industry challenges however, are not what define companies. Companies are defined by the response to industry challenges. Innovative thought, data-driven analysis and unyielding passion and commitment to serve a company’s clients are perhaps a few of the qualities that enable companies like Eureka Midstream to manage oil and gas downturns better than others. Yet, despite all the industry’s challenges, the boom-bust cycles, commodity price fluctuations and capital intensive requirements, ask any oil and gas person why they continue to do it all and you’ll hear a similar response, “We just love it.”