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Backed by EnCap Flatrock Midstream LLC with a cool $400 million, Caiman Energy brings gathering and processing capability to its anchor shippers.

Through July, midstream company Caiman Energy LLC had won contractual dedications for gas take-away services from producers in West Virginia and Pennsylvania, which hold an aggregated 400,000 acres of prime Marcellus shale-gas assets. Caiman designs, builds, owns, operates and acquires compression, gathering, transportation, treating, conditioning and processing facilities.

EnCap Flatrock Midstream LLC backed the deal with $400 million in equity commitments. The recently formed private-equity capital provider was created by Flatrock Energy Advisors LLC and EnCap Investments LP, which has closed more than $7 billion of principal investments and corporate financial transactions for more than 150 U.S. and European institutions. The contracts and equity will enable Caiman to continue to expand its gas-gathering and processing capacity in the prolific play.

To date, Caiman has completed and is operating some 30 miles of gathering lines in West Virginia, a gas-processing facility at its Fort Beeler site in Marshall County, and now plans a broad expansion.

Soon Caiman will break ground on its natural gas liquids (NGL) handling facility, which includes a 25-mile pipeline to an Ohio River-based terminal and fractionation plant.

The company plans to build an additional 75 miles of gathering lines (some as large as 24 inches in diameter), expand its 20 miles of condensate gathering pipelines, add 30 MMcfd of processing immediately, and add gathering lines to serve the lean-gas areas of the play. And that’s just for starters.

The new equity raise will be used to fund these and other projects.  The raise was led by EnCap Flatrock Midstream LLC, Caiman’s initial investor, and includes about 20 institutional investors.

In an exclusive interview, PipeLine and Gas Technology talks with Caiman’s president and Chief Executive, Jack Lafield, and EnCap Flatrock’s Managing Partner, Bill Waldrip, about their collaboration and plans for the future.

PGT: What drove EnCap Flatrock’s new investment in Caiman Energy?
Waldrip: It’s not necessarily new—it’s expanded. We formed and backed Caiman in February 2009. During the spring, Caiman was searching for opportunities and found a southwestern area of the Marcellus that it really liked. It has been focused and working hard in that area, with a great deal of success. So we are expanding our commitment to the management team and providing them with the capital they need to execute opportunities in the area.

PGT: Who is the anchor shipper on your new pipelines?
Lafield: One of the first key producers that drew Caiman into the area is a company out of Cleveland, Ohio, by the name of AB Resources LLC. They are partners with Chief Oil & Gas LLC, another of our anchor shippers. Additionally, we worked with Trans Energy Inc., a West Virginian company that has about 35,000 acres in the northern West Virginia.  We have already connected some of their initial wells. These all are dedications in strong producing areas of the Marcellus. Each of these companies have basically committed to us to be their midstream provider. We’ve entered into new relationships with quite a few others, though some of those are confidential.

PGT: What areas are you targeting?
Lafield: We’re looking at the southwestern part of the play, which we consider probably one of the two major core regions of the Marcellus, with the  other being located in northeastern part of Pennsylvania,. This southwestern area is in Green County, Pennsylvania, and the northern part of West Virginia. Initially, we have focused on this rich-gas area. This is gas that needs infrastructure developed around processing the gas for the removal of liquids as well as moving the gas to major East Coast markets. Historically, that’s been a problem because there hasn’t been the necessary infrastructure. Some producers have not been able to go ahead and develop their acreage because of lack of midstream infrastructure. The first agreement we executed was last fall, to start construction on a gathering system and a processing facility. We’re putting in a 120-MMcfd cryogenic plant, which should completed by November.  We’re also continuing to build out gathering infrastructure all through Marshall and Wetzel counties, West Virginia and on into Green County. It’s an aggregation system so producers can have an avenue for their gas to get to market.

PGT: Did Caiman begin by acquiring assets?
Lafield: No, we started from scratch. We are flowing gas on systems that we started in December 2009. By July we had 30 miles of pipeline in, and we’re flowing gas and temporarily processing it through our Fort Beeler facility. We’ll move that gas through our larger plant later this year.

PGT: Will you continue to grow at a pace with the producers or try to get ahead of some of the production?
Lafield: I think there’s a combination there. We are taking some risk to build some systems down into areas where we there is no infrastructure and no production. Producers have indicated to us that if infrastructure was there in certain areas, they would begin their drilling programs. But then again, you walk before you run. We have to watch for results and look at the development by each producer in the area and see when they bring rigs in. Obviously, the price of gas has slowed things down a little bit. But it takes time to get the facilities in. We are well supported by the acreage dedications and drilling commitments that we have from some of the producers. So we are starting to build a significantly extensive gathering system. That’s one of the reasons for raising the additional capital.

PGT: Your pipelines have producers’ commitments. Does your Fort Beeler expansion have the same?
Lafield: We are close to executing an agreement with an additional producer who’s commitment will have the plant fully contracted. Soon, we’re going to sit down with our producers to look at the next plant expansion.

PGT: How did you acquire the Fort Beeler facility?
Lafield: The plant is a brand new state-of-the-art cryogenic plant built by Tom Russell out of Tulsa. It was a plant that had just been completed and was available through another party that had ordered it and didn’t have a need for it. We are excited about getting this new plant up and running. A company out of Pennsylvania, Chapmen Corporation, is doing the construction installation of the new plant for us. They have installed several other cryogenic plants in the area and are highly qualified to come in and handle putting in these facilities.

PGT: Are there challenges to building pipelines in the area?
Lafield: Mostly, it is pipelining as usual, except that there are more rolling hills here than in Louisiana and Texas. We are learning every day. We’ve put several miles in the ground and are learning about techniques and different ways to do things more economically and faster as we go. There’s definitely a learning curve to build new high-pressure infrastructure in this part of the country. Danny Thompson, a partner at Caiman, heads up our engineering and operations group. While he led the engineering and operations team for Crosstex Energy, he put in a considerable amount of new infrastructure in the Barnett Shale in Texas.  Because of his background and that of his team’s, the knowledge and capability we have for building pipelines is at a very high level.
Waldrip: I would also add that these guys worked through a very challenging winter in this area. The Northeast can always be challenging, but this winter the area had near-record snowfalls. We began in a difficult construction period, but Thompson and his team did a great job of managing and getting things done on time.
Lafield: People in the area told us, when we first started working up there, “It gets cold up there, but it doesn’t really snow that much.” Well, we found out that wasn’t necessarily true. (Laughs.) We actually hired Universal Ensco Inc. to do two different routing plans for some of our major pipelines, including the one 24-inch diameter line that is under construction today. They told us West Virginia averages 24 inches of snow annually in this area. In 2009, the first snowfall in December was 26 inches. We thought that would be the last snowfall. But that wasn’t right either. As Bill says, we were thinking that winter would cause a little delay here and there, but it was basically a 90-day-we-can’t-do-anything delay. We are going to be a little more cautious, and have our eyes a little wider open going into this winter.

PGT: There are 20 institutional investors in this equity raise. Do you think there is a growing demand for midstream investment, or just for this particular company in this particular area?
Waldrip: Well, I’d probably say, some of both. On our core fund, we had a very successful fund raise right at $800 million during what was one of the most difficult financial eras that we’ve seen. At the time, the investors told us, “I really like the story. I really like the space, but I just can’t do anything right now.” This new investment provided an opportunity for some of them who have become a little healthier to come back in and participate. I think they very much like this space.  They see the obvious need in most of the developing shale plays that just don’t have the infrastructure to meet the development that’s occurring now and will continue to occur in the coming years.

PGT: Do you anticipate follow-on investments in Caiman?
Waldrip: First, I’ll tell you that we really liked the opportunity set and as we continue to see Caiman expand, there could be additional opportunities down the line, although we think this capital raise will carry us for several years. Second, we’re sitting with a fair amount of dry power right now, and we continue to look for opportunity sets in the midstream sector.

PGT: Do you plan to develop assets elsewhere?
Waldrip: We’ve chosen Caiman to concentrate on this area because we found that the new infrastructure was quite necessary for producers to be able to drill leases. We’ve found that private equity is the key component in financing this kind of infrastructure. The traditional master limited partnership has a lot more difficulty with greenfield projects where cash flow may not be generated to a level necessary for good distribution payments for two or three years. We found that higher risk tolerance offers a better reward profile for the kind of capital fitting this area. I think the management team we put together has a long history of building these kinds of facilities and being in these kinds of plays. I have to say, in my 35 years in this business, this may be the best midstream opportunity that I’ve ever seen for building out new grassroots facilities.

PGT: How much capital do you think could be attracted to the Marcellus?
Waldrip: We see a considerable amount of needed infrastructure. We see this as a long-term development. We expect that tens of billions of dollars will be spent here in overall pipeline infrastructure, not in just gathering and processing, but transmission as well. We are in the early stages. We are kind of the Daniel Boone out there. Builders are putting pipeline in, paving the new roads for the first time and really setting up the infrastructure.

PGT: Is there too much ethane in the rich gas area?
Lafield: The ethane content varies from about 10% to 15% of the rich gas content. At this point, we have not seen a solution that offers natural gas price equivalents for the ethane. Our goal is to blend gas that has much less ethane content with higher ethane-content gas so we will be able to meet pipeline quality specifications. We feel confident that we can move all the ethane in the gas stream. If an ethane solution will give us more value, we’re going to have the capability to support that project by delivering ethane in liquid form.

PGT: How about that propane?
Lafield: Propane is valuable to the Northeast as a rural fuel while butanes and natural gasolines are refinery feedstocks, and so right now we are focused on the local Northeast market. There have been discussions about moving these products to Sarnia, Canada and we are still evaluating the economics of these options.