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Crestwood CEO: Shales the Right Place for a Midstream MLP

Crestwood Midstream Partners LP is a bit of an anomaly in the midstream sector as it is focused exclusively on shale plays, CEO Robert Phillips told financial analysts Tuesday. It's the only partnership that does so, save for the much larger Chesapeake Midstream Partners, he said.

Crestwood, a portfolio company of private equity firm First Reserve Corp., was created from the acquisition of Quicksilver Gas Services for about $700 million last year (see Daily GPI, July 26, 2010).

"There were many different value propositions out there," Phillips said. "We could have gone into storage; we could have gone into downstream markets. With my background at El Paso [Corp.] and Enterprise [Products Partners LP] I've run assets across all four major food groups: gas, gas liquids, crude and refined products.

"We decided that the shale play phenomenon was not only driven by technology but also had the perfect economic profile for master limited partnerships [MLP], so we started on day one with a pure shale play strategy and we continue to work in that regard."

Initially, Crestwood was focused only in the Barnett Shale. Since then it has spread its activities across four other shale plays: the Fayetteville Shale, Granite Wash, Avalon Shale and Haynesville/Bossier Shale, where it operates 11 different pipeline systems.

Long-term, fixed contracts also are a cornerstone of the Crestwood strategy as well as developing infrastructure in step with the shale play lifecycle, Phillips said at the Wells Fargo Securities Master Limited Partnership Symposium in New York City Tuesday.

"We maintain a very selective focus on acquiring assets and contracts that generate revenues from fixed service fees as opposed to commodity volatility," he said. "It's the most unique aspect about this new company that I've started. It's about 95% fixed fee so we have virtually no commodity exposure. Our exposure is on the volume side and typically it's not a matter of if; it's simply a matter of when the producer drills the properties."

Crestwood's two largest dedications of acreage are in the Barnett and Fayetteville shales; its longest-running contracts are in the Fayetteville, Granite Wash and Haynesville, Phillips said.

The Barnett currently generates about 80% of the partnership's cash flow, "but over time as these newer assets that we've acquired begin to develop throughout the early, mid and late stage, they'll increase their contribution to our overall cash flow, so the Barnett Shale will become less and less important over time," he said.

Phillips said having a portfolio of shale plays with different levels of maturity serves the MLP strategy well. While the Barnett is "largely complete," the Fayetteville is "only about 20% developed." While the Granite Wash and Avalon Shale are emerging plays, the Haynesville/Bossier is at about the middle stage of development, he said.

"What we have is a portfolio of shale plays at different points in the development cycle, and that's important in moving the peak of our volumes and our cash flow and our distributions out year after year. As we continue to acquire opportunities we want to broaden the portfolio..."

Broadening the portfolio would include rich gas plays if the price to acquire assets is right.

"As a general rule, I think the rich gas plays are feeling pretty cocky right now," Phillips said. "It's hard to buy into a rich gas play of any quality or size at less than about 12-13 times current cash flow. It's hard to make money when your buy-in price is that expensive. On the flip side of that, we're beginning to see a little bit of a separation between rich gas value and dry gas value. Our most recent dry gas play in the Haynesville/Bossier we bought at 7.5 times cash flow. So buy-in price does matter..."

Crestwood strives to buy into core acreage dedications in areas that offer strong economics for producers. "We want to buy into areas where we see a history of improving well performance over time," Phillips said, emphasizing again the need for long-term, fixed contracts. "That's about as conservative a way that you can grow a midstream business in today's market. All of the plays where Crestwood is active are seeing improving well performance.

"As time goes on we continue to look at other shale plays like the Marcellus and the Eagle Ford and other rich gas areas where the drilling economics may be slightly superior to the dry gas basins. We're going to continue to diversify not only our geographic basins but our producer accounts as well."

Crestwood has more than 300,000 acres dedicated to its systems with more than 5 Tcfe of reserves potential under long-term contracts of 10-15 years, "certainly long enough to go all the way through the shale play development cycle," Phillips said.

In the Barnett Crestwood serves producer Quicksilver Resources, and in the other four shale plays where it is active its roster of producer clients is BHP Billiton, BP plc, Chesapeake Energy, ExxonMobil Corp.'s XTO Energy, Linn Energy, Comstock Resources, Forest Oil and Devon Energy.

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