Whit Keuer: North American Midstream Strategy in a Time of Uncertainty

Low oil and gas prices, combined with an influx of capital expenditures, are raising the stakes for midstream operators. Whit Keuer, a partner with Bain’s Oil and Gas practice, shares three steps midstream companies can take to tackle these industry challenges.

Read the Bain Brief: North American Midstream Strategy in a Time of Uncertainty

Read the transcript below.

WHIT KEUER: The midstream industry is really at an inflection point right now. The super cycle of growth that the industry has enjoyed is really coming to an end, and you see that in some of the key financial data. New projects, or growth capital, are down 15% to 20% over the last year. And shareholder returns, which held up pretty well, have underperformed the S&P over a one- and three-year period. Now, this is at a time when there's more money entering the industry, particularly from private equity. And we estimate that there's close to 100 management teams on the sidelines, ready to put capital to work and to start new ventures in the midstream space. So there's an enormous amount of capital that's chasing fewer deals.

The impact of all of that are compressed industry returns. So this is really quite a challenging backdrop that midstream companies are facing. And we've advised executives to address this really in three different ways. The first is to take a page out of the playbook of E&P companies, and to set an ambitious cost agenda. Midstream companies, rightly so, have been focused on growth, but haven't been as focused on efficiency or in taking costs out of the supply chain. And we have just seen enormous opportunity from the companies we've worked with. The second is to really study your portfolio, and identify what are the Tier 1 assets in basins like the Marcellus, or the Permian? And what are the Tier 2 and Tier 3 assets, where there just isn't going to be as much activity going forward because they're higher cost?

Looking at those Tier 2 and Tier 3 assets, there's a number of options that companies have, such as being a consolidator to get to an even lower cost position, or divesting the assets. The third and final thing that we've advised companies on is to chart a path for growth beyond the next three years. Companies that we have seen tend to evaluate projects one by one, rather than taking a more strategic view and looking at a basin or a market and saying, what are the steps in the value chain that we need to build assets, that we can bring a complete solution to our customers? And so taking that full value chain perspective is really what we're advising companies on. And it's a fundamentally different approach than what midstream companies are taking today.

Read the Bain Brief: North American Midstream Strategy in a Time of Uncertainty