Private Equity Firms Solving Water Headaches for Shale Drillers

FeaturedFracking and Private Equity

For years, shale drillers have struggled with the process of disposing of wastewater from the drilling operation. Private equity firms may hold the solution, and are flocking to the drilling industry to capitalize on an emerging market opportunity. These private equity firms, including WaterBridge Resources LLC, Five Point Energy LLC, and Global Infrastructure Partners, have spearheaded the construction of wastewater pipelines and water disposal wells in oil-producing shale regions.

The Permian Basin

One oil-producing shale region is of particular interest to drillers and private equity firms alike. This region, known as the Permian Basin, sits on the western edge of the United States Mid-Continent Oil Field and spans portions of New Mexico and Texas. The subsurface Basin occupies an area of 75,000 square miles. The Basin gets its name from its concentration of rocks from the Permian geologic period, and is known for its vast oil and gas resources. Approximately 2 million barrels of oil are pumped from the Basin each day. Cumulatively, the Basin has produced nearly 29 billion barrels of oil and 75 trillion cubic feet of natural gas. Traditionally, energy producers have employed vertical drilling methods to recover oil and gas from the deposits, but new technologies such as horizontal drilling and hydraulic fracturing (fracking) have opened new areas to exploitation.

Water Problems for Shale Fracking Operations

In the hydraulic fracturing – commonly known as “fracking” — process of recovering subsurface oil and gas deposits, high pressure fluid is pumped into wells to crack shales and sandstones containing petroleum products. The released oil and natural gas is then pumped out. For shale drillers, this creates significant problems associated with wastewater production. For every gallon of oil extracted from the Permian Basin, five gallons of water are produced. Private equity firms have descended on the region, seeing a multi-billion dollar opportunity in creating a network of injection wells and wastewater pipelines. In fact, an industry group known as the Produced Water Society estimates that there may be as many as six opportunities for billion-dollar companies to handle the wastewater in the Basin.

Today, about 20 percent of all wastewater generated by fracking is outsourced to private equity-backed firms like WaterBridge and Goodnight Midstream LLC. As early as next year, about 50 of the midstream-produced water will be managed by these firms and others as more companies apply their financial resources to the problem.

Financial Overview of the Midstream Water Market

Across the United States, the energy industry has spent approximately $34 billion on wastewater management in 2018 alone. About $12 billion of that figure was spent in the Permian Basin, and the number represents a significant opportunity for private equity investors. Industry analysts indicate that the market will grow to $19 billion by the year 2023. WaterBridge, one of the leading players in the wastewater management market in the Basin, is involved in creating a complex network of wells and pipelines. The company is also purchasing wells and pipelines from shale drillers to expand its wastewater management network.

Benefits of Outsourcing Wastewater Management

For oil and gas producers, outsourcing the management of midstream wastewater has several distinct benefits. The first is that producers’ primary assets are their oil and gas production infrastructure, not wastewater pipelines. Energy investors wary of the high costs of wastewater disposal have pressured energy producers to find a more cost-effective solution. Private equity firms have capitalized on this investor pressure, developing solutions that save millions of dollars in annual costs.

Producers no longer have to spend investor funds on wastewater treatment and disposal – with wastewater that may be laced with chemicals and salt from the fracking process. Private equity-backed wastewater management companies handle all of the aspects of the management process, from treating the water and sending it back to producers for reuse to constructing pipelines, wells, and disposal systems. All told, while outsourcing wastewater management operations still costs producers millions of dollars, this is but a fraction of the costs associated with managing the problem themselves. Private equity firms have identified a unique problem in the energy production industry, and with their financial assets have streamlined the water management process, resulting in billions of dollars in savings for energy investors.

Niche Funding & Mega Funds

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Private equity is one of the dominant means of securing funding for new business opportunities. Private equity firms and their funds have grown by leaps and bounds over the past decade, with many achieving so-called “mega fund” status. One area of private equity funding that has received attention from financial industry analysts is that of the niche strategy funds. As niche strategies grow, so does the size of their assets. It is clear to many that niche funds no longer occupy a darkened corner of the equity funding landscape; today, these funds and strategies are basking in the glow of a growing mainstream market.

Mega Funds and the Growth of Niche Funding Strategies

In the beginning of 2019, a leading financial industry research group published a study based on data collected on mega equity funds. Mega funds are defined as those with more than $5 billion in assets. According to the study, in a period between 2016 and 2018, mega funds represented nearly 50% of all capital raised in North America. Analysts suggest this funding dominance should continue into 2019 and beyond, and that 2019 may set new records for capital.

Within private equity funds exist what have long been known as niche funding strategies. These funds target specific areas, such as unique sectors in a given asset class or a specific investment method. However, as niche funds grow – some achieving mega fund status – can they truly be considered niche, and can their strategies be seen as unique within the investment field? The answer is not a simple yes or no. In some cases, niche funding firms raise mega funds while creating secondary funding units to target niche asset classes. This is especially true in some of the largest technology-focused funds; one fund grew to nearly $13 billion, and the firm then raised a second fund to go after middle-market business opportunities. In other words, these secondary funds are designed to create investment possibilities that may be too small or too unique for the primary (flagship) fund.

The Future of Niche Funding

Financial industry experts believe that mega funds will always have their place; generating billions of dollars in assets and investing in corporate-level business opportunities. As shown above, these mega funds have grown substantially and are expected to continue to do so. Niche funds, too, are growing, and many may achieve mega fund status as partners identify new areas of growth. Balancing risks and returns through careful investment strategies is the hallmark of the niche fund, a sector of the private equity market that is sure to have a bright and lucrative future.