Inside the exit: How EnCap Flatrock Midstream weathered oil price fluctuations in Lotus Midstream investment 

When EnCap Flatrock bought the business in 2018, it was connected to seven transportation lines. At the time of exit, it had increased that downstream access to 14 lines.

A combination of growth strategies, timed with increased oil production in the Permian Basin, created a booming business for Lotus Midstream, a Sugar Land, Texas-based crude oil gathering and transportation company that EnCap Flatrock Midstream recently exited for $1.45 billion.

Speaking to PE Hub this week, EnCap Flatrock Midstream’s managing partner Samuel Pitts said that since the firm acquired the company in 2018, oil production in the Permian Basin has increased by about 50 percent.

Lotus Midstream was sold to Energy Transfer for approximately $1.45 billion in March but the deal closed earlier this month. Lotus Midstream focuses on crude oil transportation, terminaling and storage. It owns the Centurion Pipeline System, an integrated network of crude oil gathering and transportation pipelines that extends approximately 3,000 miles from southeast New Mexico across the Permian Basin of West Texas to Cushing, Oklahoma.

“When we invested in the business and made the original acquisition, we had a very specific investment strategy and execution plan,” Pitts said. “It centered around a commercial vision for the asset that required engineering, operations, commercial, finance and executive disciplines that we already had in place. The team was exceptional and executed exactly like we had laid out when we made the investment.”

During Encap Flatrock’s four-and-a-half-year hold period, Lotus Midstream transformed from a single producer-centric system into an integrated transportation network that connected the supply sources of hydrocarbons to the demand centers, noted Pitts.

When EnCap Flatrock bought the business in 2018, it was connected to seven transportation lines and at the time of exit, it had increased that downstream access to 14 lines.

Among other initiatives, Pitts said the company amplified commercial efforts to reach customers that historically had not viewed the asset as interested in third-party business.

Samuel Pitts, Encap Flatrock Midstream

“We completed over 60 strategic commercial agreements, nearly doubled the customer footprint and reduced our business concentration to the prior owner from over 70 percent of revenue to approximately a third,” he said, adding, “It was a substantial accomplishment and when we went to sell the business, it looked completely different than when we purchased it.”

Some of the success is attributed to the partnership with Exxon on a project called the Wink to Webster Pipeline, which was one of the largest transportation pipelines out of the Permian.

What made the Wink to Webster Pipeline project attractive is that it fed into some of the largest refineries in the US and the owners of those refineries were Lotus Midstream’s partners, said Pitts.

“As the owner of one of the largest gathering networks in the Permian we could directly connect our producer customers all across the region to the refiners that are shippers on Wink to Webster.  We think that offered a compelling value proposition to all of our customers across the Lotus platform,” the EnCap Flatrock managing partner said.

The project also helped insulate Lotus Midstream from production swings which could be caused by temporary changes in oil prices.

Since 2014, the oil and gas industry suffered an exodus of investors as prices of oil dipped to unattractive levels. But prices have come back, fueled by the reopening of various industries that had shut during the pandemic.

“We conservatively built the capital structures of our companies to be shock absorbers, so that we are insulated from really extreme risks in low price environments.”

Pitts also attributed the success to the management team. Since the firm’s formation, EnCap Flatrock has made more than $9.5 billion in capital commitments across 43 portfolio companies.

Other previous exits:

  • In 2018, EnCap Flatrock sold Lucid II to Riverstone Holdings and Goldman Sachs Group‘s merchant banking division for about $1.6 billon.
  • In 2018, EnCap Flatrock sold EagleClaw Midstream Ventures to Blackstone Energy Partners for approximately $2 billion.
  • In 2014, EnCap Flatrock sold Nuevo Midstream to Western Gas Partners for $1.5 billion