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Crestwood Bolting On Bakken Pipes with Arrow Buy

Crestwood Midstream Partners LP is buying privately-held Arrow Midstream Holdings LLC for $750 million, expanding its focus in the Bakken Shale and building on its just-completed merger with Inergy Midstream.

Through subsidiaries, Arrow owns and operates crude oil, natural gas and water gathering systems on the Fort Berthold Indian Reservation in the core of the Bakken Shale in McKenzie and Dunn counties, ND. The system consists of more than 460 miles of gathering pipeline, including 150 miles of crude oil gathering pipeline, 160 miles of natural gas gathering pipeline, and 150 miles of water gathering lines.

Current volumes on the system are about 50,000 b/d of crude oil, 15 MMcf/d of rich natural gas and 8,500 barrels/d of water. The assets include salt water disposal wells and a 23-acre central delivery point (CDP) with multiple pipeline takeaway outlets and a fully-automated truck loading facility.

During a conference call Thursday with financial analysts, Robert G. Phillips, CEO of Crestwood's general partner, said Arrow was being picked up "at a very attractive multiple of 10 to 10.5 times 2014 EBITDA...Other transactions in the area have been completed at much higher multiples; we're aware of that.

"We were in the right place at the right time to make this transaction. We think we were uniquely positioned as a buyer, and we think that is the reason for the very attractive acquisition multiple."

Phillips stressed that there is "a significant amount of growth left in the Bakken Shale." Arrow's business is in the core of the core of the Bakken, he said. "This is a great crude oil-enriched gas gathering business that we're acquiring from Arrow..."

The Arrow gathering systems are anchored by long-term, primarily fee-based, contracts with producers that have dedicated more than 150,000 acres to Arrow including more than 1,000 potential drilling locations on the acreage. Customers are "world-class shale developers" that have substantial development programs on the dedicated acreage and have identified the Bakken Shale as a significant driver of their future production growth, Crestwood said.

The contracts provide for fixed-fee gathering services with annual escalators for crude, natural gas and water services. There are currently eight drilling rigs running in the area of dedication with additional rig activity in areas adjacent to the system, Crestwood said.

The Arrow systems are about 60 miles southeast of Crestwood's COLT Hub crude rail and pipeline terminal in Williams County, ND, and connect with COLT through the Hiland and Tesoro crude oil pipeline systems. The COLT Hub is one of the Bakken Shale's leading rail transportation avenues for East Coast and West Coast markets with current COLT Hub rail loading capacity being expanded to 160,000 b/d, Crestwood said.

Some COLT customers are also major purchasers of crude oil at the Arrow CDP, "and the direct connectivity between Arrow and COLT provides significant opportunity for synergies and expanded customer services," Crestwood said.

"We believe this transaction is a strong first step in executing Crestwood's growth strategy following our recently closed merger with Inergy [see Shale Daily, May 7]," said Phillips.

"We've already largely completed our integration of Crestwood and Inergy, so this additional business will be an easy fit for the new Crestwood. It will be an easy integration with our existing COLT Hub operations. I really provides incredible synergies with COLT," which Inergy had acquired in 2012.

"We are keenly focused on growing our crude oil and NGL [natural gas liquids] businesses," Phillips said. "After the close of this transaction, we will be one of the largest Bakken midstream service providers, servicing approximately 18% of current total Bakken crude oil production. Nationwide, we will be handling over 470,000 b/d of crude oil and NGLs in addition to over 2 Bcf/d of natural gas through our gathering systems and transportation assets."

The Arrow system is being expanded to capture currently flared associated natural gas. The project is expected to be "substantially complete" during this quarter. "Thereafter, the systems will be primarily built-out with modest organic capital requirements of approximately $80 million over the next 18 to 24 months to reach targeted operational throughput capacities of 125,000 b/d of crude oil, 100 MMcf/d of natural gas, and 40,000 barrels/d of water," Crestwood said.

Capturing the additional flared gas is important in two respects, Phillips told analysts, as it gives producer customers better overall economics and assures regulators and area Native American residents "that we're dealing with environmental compliance and that we're working hard and aggressively to comply not only with regulations but to protection the people and the environment here on the reservation."

The acquisition is to be accomplished through Crestwood Arrow Acquisition LLC. The transaction is expected to be immediately accretive to Crestwood's estimated distributable cash flow per limited partner unit in 2014, with growing accretion thereafter, Crestwood said. Closing is expected in the fourth quarter.

Crestwood closed down less than 1% Thursday on the New York Stock Exchange at $22.79/share.

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