The oil and gas midstream industry gathers, processes, and transports hydrocarbons, connecting the upstream producers to the downstream consumers. It is the plumbing that makes the world’s energy system work and plays a large role in both conventional and unconventional plays. Currently, there are more than 1.2 million miles of natural gas pipelines and 140,000 miles of oil pipelines in the US. Pipelines are only part of the story, however. The midstream space contains a number of business models ranging from gathering and processing natural gas and natural gas liquids at and near the wellhead to trading and storing oil at Cushing, Oklahoma, for example.
The industry today includes companies of all sizes, including smaller private companies, as well as large public companies and master limited partnerships. To discuss the opportunities and challenges in the oil and gas midstream industry, the TWA HR Discussion editors interviewed Ryan Lewellyn about his experiences managing a private-equity-backed company and his outlook on the sector.
Ryan Lewellyn is the president, chief executive officer, and a founding partner of Tall Oak Midstream. His efforts drove the company’s remarkable growth culminating in the USD 1.55-billion sale of its STACK Natural Gas, STACK Crude Oil, and the CNOW Natural Gas Systems. Lewellyn is currently focused on Tall Oak II and its more than 400 miles of pipe and 100 MMcf/D in processing in the northwest STACK [STACK is an abbreviation for Sooner Trend, Anadarko basin, and Canadian and Kingfisher counties, an unconventional play in Oklahoma. CNOW stands for the Central Northern Oklahoma Woodford play]. Before forming Tall Oak, Lewellyn served as managing director of DCP Midstream’s Mid-Continent business unit. He holds a business degree from Virginia Tech University and an MBA from Penn State University.
What major differences do you see between the upstream and midstream industries?
Risk tolerance and cost of entry. Midstream typically requires a large amount of capital that yields a lower expected return but has more assurance of success with less risk. In upstream it is possible to make a smaller upfront investment in acreage or drilling that typically has a larger potential return, but with fewer guarantees of volumes and commodity prices.
From the engineering side of things, midstream is very hydraulic-heavy. Engineers in our industry are normally focused on either gas processing or gathering and compression. Engineers in the midstream space tend to stay with their companies for a longer duration than those within upstream. This is most likely attributed to the benefit they bring once they are familiar with the particular assets that a midstream company owns and operates.
As a smaller company starting from the ground level, putting the right people in place quickly can be key. What were some of the challenges you faced in assembling a management team?
The biggest challenge is getting some of the top performers in the industry to leave the larger companies; often times this requires them to forfeit the long-term incentive programs that they have been awarded. It was a significant benefit that the Tall Oak Partners had a diverse background coming from three different industry companies. We were very fortunate to have great contacts across the industry of extremely talented folks that were interested in working with us.
Tall Oak I was formed in early 2014, and Tall Oak II in 2015. How has the changing oil and gas price environment shifted the company's business strategy and its people strategy?
Actually, our original business strategy included an expected downturn in commodity pricing. We simply do not feel it is prudent to have a business plan in this cyclical industry without one. Pricing definitely impacted the pace of growth in some of our key dedicated areas, and we had to stay flexible and nimble to adjust. The main key for us is high-quality and frequent communication with our customers to ensure that we adjust to their ever-changing plans.
Tall Oak initial assets were not sold until early 2016. What were some of the challenges of managing the sale of operating assets while expanding into new opportunities outside of the Mid-Continent region?
The biggest challenge was in managing the rapid growth we were experiencing in the STACK, while trying to market a premium asset when oil prices were plummeting and the entire industry was stressed. Our team was appropriately staffed to handle multiple assets across different basins, so we had members of our team focused on our growth in other areas that were mostly isolated from the sale of Tall Oak I. It was taxing on the management team to navigate these waters, but our past involvements on complicated deals across the energy industry proved invaluable.
How does working as part of a private-equity-backed company differ from working for a more traditional public company? What are the opportunities and challenges?
The biggest differences between being a private-equity-backed company as opposed to a public company are the long-term focus and the assets’ age and condition. Our investors are focused on long-term growth and long-term returns. While we have quarterly board meetings, we are not subject to fickle investors that are reacting to the quarterly, weekly, or daily impacts to earnings and distributions. This allows us to be less reactive to market conditions and to take a more strategic approach to how we manage our customer relationships, contracts, and capital investments.
The other benefit we have is that we are not normally challenged to manage significantly aging assets that present costly performance issues and timely maintenance plans. We have mostly new assets that have been built and designed to serve our customers and their modern well completion techniques and associated higher volumes. Some of the larger challenges for a private-equity-backed firm are securing cost-effective capital and establishing a reputation that you can handle a large-scale project to serve a large producer.
Oil and gas, whether it is upstream, midstream, or downstream, involves a lot of companies working together on large-scale projects. How does Tall Oak work with oilfield services companies and other suppliers to manage its ongoing projects?
The majority of our field labor is contracted, but we directly hire and employ the professionals that develop, engineer, and manage each project. Once a project is fully scoped, we choose a specific service company to execute the construction by closely vetting each contractor’s safety record, specific performance in the respective job we are asking them to execute, and certainly, their cost structure. Many of our projects, specifically our plant projects, require multiple contractors, sometimes more than 10, on a single project. Our employees manage and direct each crew to ensure not only an on-time, on-budget project, but a project with a perfect safety record when everything is finished. We want our own employees to go home at the end of the day the same way they came to work; we expect the same safety culture of our service companies as well.
What advice would you give to young graduates entering the field and to those who are looking for new opportunities?
Show up to work 10 minutes before the first employee at your reporting location and leave 10 minutes after. That way no one knows how early you got there or how late you stay. Get a diverse background across the business units that drive earnings within your company and avoid back-office roles that do not get exposure to the core business. Secure a senior executive mentor and meet with them regularly. This is particularly important early in your career as you establish a reputation. Many leaders tend to draw quick opinions and conclusions on their employees that they are hesitant to change. Once you are known for working hard, possessing a broad understanding of the industry, and having established strong relationships with senior leaders, you will reap the benefits throughout your career. I can point to many examples of this throughout my career and to those of my most successful colleagues.
What stands out to you as the main points that a young professional needs to know when stepping out to start his or her own business?
You will be as good as the team you put around you. From your administrative assistant to the most involved board member, your company’s success will depend on your ability to secure the right backers and attract talent to your team. You need to spend time to completely understand all the regulatory and tax laws that will impact your business—from ownership to sale.
Where do you see the industry heading in the next 5–10 years, and what steps should we be taking as an industry now to ensure we are ready?
The only thing I can say for certain is that technology advancement and commodity prices will have a huge impact. Completion techniques will continue to improve, which will drive costs down and improve results and returns. New plays will be discovered and existing plays will expand. Commodity prices will be cyclical and could experience a significant disruption via political means or technology (i.e., driverless, fuel-efficient vehicles). We need to continue to attract the brightest minds, hardest-working, and most talented employees. The list of things that need to be done to prepare and respond to these changes is significant, but our industry has proved itself more than capable to handle these types of challenges.
 Source: The World Factbook, US Central Intelligence Agency, accessed 27 September 2016. Converted from km to miles using 2013 figures, the most recent available.