Crestwood buys in to midstream demand

A U-turn in North America’s oil and gas flow is pushing demand for infrastructure faster than Robert Phillips has ever seen in his 37-year career.

It mirrors a reversal his own midstream company took three years ago when — lured by the economics of a higher-priced commodity — it changed its primary business from natural gas to oil. Houston-based Crestwood Midstream Partners took another leap in that direction this month when it merged with Inergy Midstream and created an $8 billion publicly traded master limited partnership focused on liquids transportation.

Three days after the Oct. 7 deal, Crestwood agreed to buy another oil and gas gathering systems operator, Arrow Midstream Holdings, for $750 million. That has kept Phillips, 59, busier than ever, but the Crestwood chief says he’s ready to tap the merger and acquisitions market again.

“I’ve never seen a better time to be in midstream,” said Phillips, who served from 2005 to 2007 as CEO of Houston-based midstream giant Enterprise Products Partners.

Phillips spoke with FuelFix about Crestwood’s direction in oil and gas, big changes in the industry and the company’s appetite for bolt-on acquisitions that add assets in existing functions or locations. These are edited excerpts:

FuelFix: What drew Crestwood and Inergy to the merger?

Phillips: Inergy had been transforming itself in 2011 and 2012, when it exited retail propane and made some investments in traditional midstream assets. But it didn’t have a midstream background or experience, and the assets didn’t really create a midstream company like Crestwood. We were merging Crestwood’s wellhead assets with Inergy’s downstream assets, a great combination, and we were combining the natural gas focus of Crestwood with the natural gas liquids and oil focus of Inergy.

FuelFix: What’s driving demand for midstream companies?

Phillips: I’ve never seen more demand for new infrastructure or more demand to fix existing infrastructure, and it’s coming from nontraditional areas. We’ve been transporting gas through big pipelines to the Northeast, but now we have this incredible Marcellus resource base growing so quickly that supply is in excess in the Northeast. The Bakken in North Dakota represents the same thing on the crude side. There are huge supplies that have to get to market, and it’s allowed us to build new infrastructure at a faster pace than ever before in the industry, as well as raise new capital.

FuelFix: How does merger and acquisition work in your growth strategy?

Phillips: Our acquisitions are focused around our existing assets, so we look for bolt-on acquisitions. Arrow was a perfect example of that. Buying an oil gathering system connected to the COLT Hub (a pipeline and crude rail terminal in North Dakota) makes sense financially and operationally. It also makes sense commercially because we have a lot of the same customers. M&A is important, but it has to be an acquisition of an asset where we’re located in order to get operational synergies.

FuelFix: How does being publicly traded now help you make deals?

Phillips: Master limited partnerships make it easier to raise capital for midstream companies. All of us actively raise capital in the public markets to go hand in hand with our growth opportunities. There’s a lower cost? of capital, which improves our long-term investment returns.

FuelFix: Tell me about the outlook for the midstream industry.

Phillips: There’s a lot to suggest there’s $200 billion to $250 billion in infrastructure to build out over the next 10 years for the midstream sector to take shale supplies to the market. There’s too much supply in the Northeast market and in other parts of the country, and that creates infrastructure opportunities.