Midstream Moves Stir Shale Play Activity

While shifting ownership of upstream assets in the Fayetteville Shale have garnered Wall Street attention, smaller pipeline companies are also making deals to gain entry in the Arkansas’ unconventional shale play.

Crestwood Midstream Partners LP’s recently announced that it planned to acquire the midstream assets in the Fayetteville Shale and the Granite Wash Shale play from Tulsa-based Frontier Gas Services LLC for approximately $338 million. That deal, announced at the close of business on Friday, Feb. 18, was overshadowed by blockbuster news that same weekend of Australian mining and energy giant BHP Billiton purchasing Chesapeake Energy Corp.’s upstream natural gas assets in the Arkansas play for nearly $5 billion.

Still, Crestwood’s smaller deal brings another well-capitalized energy company with Texas-built shale credentials to the Arkansas oil and gas sector. The newly-created master limited partnership was formed in Oct. 4 after the company formerly known as Quicksilver Gas Services LP changed its name to Crestwood Midstream Partners.

Since then, Crestwood has engaged in a buying spree that includes 46 miles of natural gas gathering pipelines in the emerging Avalon Shale trend in Southeastern New Mexico, along with the pending deal to acquire the Fayetteville Shale pipeline gathering system and Granite Wall assets.

Frontier’s Fayetteville assets consist of approximately 127 miles of natural gas pipeline with gathering capacity of 510 million cubic feet per day (MMcf/d), and treating capacity of 165 MMcf/d. The Arkansas systems also interconnect with several larger interstate pipelines that serve the shale, supported by long-term, fixed-fee contracts “with blue chip producers who have dedicated approximately 100,000 acres in the core of the Fayetteville Shale to Frontier,” Crestwood officials said.

Frontier’s Granite Wash purchase consists of a 28-mile pipeline system and a 36 MMcf/d cryogenic processing plant in the Texas Panhandle.

"Following this acquisition, Crestwood LP will be uniquely positioned as a predominantly shale play midstream service provider in three world class basins, the Barnett Shale play in North Texas, the Fayetteville Shale play in Arkansas and the Granite Wash play in the Texas Panhandle," said Crestwood LP CEO Robert Phillip. “With an expanded footprint, Crestwood LP will have substantial organic growth opportunities in both the Fayetteville Shale and the Granite Wash areas. In the Fayetteville area, volume growth through 2012 is supported by drilling activity necessary for producers to hold leases by production.”

Crestwood said it expects to finance the equity portion of the purchase price through a private placement with institutional investors who have agreed to buy 6.2 million units of new Class C stock issued at a price of $24.50 for proceeds of $153 million. Barclays Capital acted as sole placement agent to Crestwood on the private placement of the Class C units.

Crestwood has also obtained a commitment from UBS Loan Finance LLC, BNP Paribas, Royal Bank of Canada and Royal Bank of Scotland plc for a senior unsecured bridge facility of up to $200 million that will be available to finance the remainder of the acquisition, expected to close sometime in the second quarter.

Besides the Crestwood-Frontier deal, midstream and downstream activity in the Fayetteville Shale has picked up substantially in the past several months. In early December, the $1 billion Fayetteville Express Pipeline project came online with an initial capacity of 2 billion cubic feet per day. The 185-mile pipeline that originates in Conway County is a 50/50 joint venture between pipeline giants Kinder Morgan Energy Partners and Energy Transfer Partners.

Also, Petrohawk Energy Corp. recently closed on its deal to sell its midstream properties in Arkansas’ Fayetteville Shale for $75 million to XTO Energy, a unit of ExxonMobil Corp. That was part of a larger deal between the two companies to sell Petrohawk’s shale-based oil and natural gas resources in Cleburne and Van Buren counties to the ExxonMobil subsidiary for $575 million.

Meanwhile the BHP and Chesapeake deal also includes the sale of nearly 420 miles of pipeline currently owned and operated by the Oklahoma City-based oil and gas producer.

Generally speaking, the upstream sector of the oil and gas industry is involved in the drilling, recovery and production of crude oil and natural gas. That part of the petroleum industry is also more commonly known as the exploration and production sector.

The midstream sector processes, stores and transports those petroleum and natural gas commodities to market, whereas the downstream sector refers to the refineries, retail locations and petrochemical plants that manufacture or distribute those products for consumers – such as gasoline, diesel and jet fuel, heating and motor oil, plastics, rubber and pharmaceuticals.

According to the U.S. Energy Information Administration, Arkansas had 6,267 miles of interstate and intrastate pipeline gathering and transporting natural gas at the end of fiscal 2008. Most of the major interstate natural gas pipeline companies operating in the Southwest Region – which includes Arkansas, Louisiana, New Mexico, Oklahoma, and Texas – are primarily exporters of the region’s natural gas production to other parts of the country.