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Crestwood Taking Half Stake in Niobrara Gathering System

Crestwood Niobrara LLC is buying a 50% interest in Jackalope Gas Gathering Services LLC from RKI Exploration & Production LLC for $108 million, parent Crestwood Midstream Partners LP said Monday.

The Jackalope gas gathering and processing system in Converse County, WY, provides Crestwood Midstream with an early-stage entrance into the emerging Powder River Basin Niobrara Shale play and positions it for significant future infrastructure development across the rich gas and crude oil midstream value chain, the company said. The deal is expected to close during the third quarter, subject to customary regulatory approvals.

"...Crestwood has been focusing its development efforts on rich gas plays such as the Powder River Basin Niobrara Shale," said Robert Phillips, CEO of Crestwood Midstream's general partner. "This transaction is an important next step in the development of that strategy and positions Crestwood in a growing play with an experienced midstream partner supported by a long-term contract and large acreage dedication being developed by very capable shale producers."

The other 50% interest in Jackalope is owned by Access Midstream Partners LP, which acquired its stake last December from Chesapeake Energy Corp. (see Shale Daily, Dec. 13, 2012). Access will continue to provide field operations and construction management for Jackalope and Crestwood Midstream will assume the commercial development role for the joint venture.

RKI is a privately-owned, independent exploration and production company focused on the Powder River, Permian and Denver-Julesberg basins in which private equity firm First Reserve owns a significant minority ownership position. First Reserve is also Crestwood Midstream's indirect general partner and largest common unit holder.

Chesapeake and RKI combined have accumulated the largest acreage block in the Powder River Basin, spanning more than 750,000 acres and are developing the acreage under a joint development agreement, Crestwood Midstream said.

The Jackalope System is being developed to gather and process rich gas produced from a 311,000-acre area of dedication in Converse County where RKI and Chesapeake have focused the majority of their drilling. The Jackalope System is composed of 100 miles of gathering pipelines and 9,400 hp of compression equipment. There are near-term plans to install a new gas processing facility and expand the gathering system.

"The Jackalope System, while in its early buildout stage, provides significant visibility to cash flow growth as midstream infrastructure is expanded to support Chesapeake and RKI's aggressive development plans," Phillips said. "With approximately 10 drilling rigs currently running in the area, a 20-year cost-of-service midstream contract, and more than 1,000 estimated drilling locations in the current acreage dedication, we believe this investment has the potential to be another great, high-growth shale play like our Marcellus position [see Shale Daily, Jan. 9]."

The existing Jackalope assets and future development are supported by a 20-year gathering and processing agreement with Chesapeake and RKI under which Jackalope receives cost-of-service based fees with annual redeterminations that provide for an "attractive rate of return" on invested capital, Crestwood Midstream said.

"...[T]he Jackalope platform provides additional opportunities for Crestwood to extend its value chain services to include NGL [natural gas liquids] and crude oil storage, blending, truck and rail terminaling, transportation and marketing," Phillips said. "It also further highlights the merits of Crestwood's recently announced combination with Inergy LP and Inergy Midstream LP, which specialize in these value chain midstream services [see Shale Daily, May 7]."

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