May 2014, Vol. 241, No. 5


Crestwood Exec Traces Progression From Mergers To Emergence As $9B Player In Midstream, Shale

Erin Nelsen Parekh, Associate Editor

As master limited partnerships (MLPs) come to dominate the midstream business, the people who helm them must understand not only the intricacies of gas and liquids extraction and transportation, but the financial methods and strategies that drive their firms’ investment and market success. One way to gain that knowledge is from a career path with plenty of unexpected turns.

Heath Deneke began his 18-year and counting involvement in the natural gas industry working for Sonat, Inc., a gas pipeline and E&P company. After graduating from Auburn University with a mechanical engineering degree, he applied for a design engineer job in the facilities planning group.

“The vice president that ran the facilities planning department also was responsible for the rates and regulatory department,” Deneke said. “At the end of the interview he leaned over and said, ‘You know, you’re probably a good fit for the engineering job, but would you consider being a rates and regulatory analyst?’ He eventually sold me on the rate analyst job and the opportunity to get more acquainted with how the pipeline business made money.”

Both the business knowledge and Deneke’s flexibility came in handy through a career where his employer was acquired twice, as El Paso Energy bought Sonat and Kinder Morgan bought El Paso. Deneke moved through financial, strategy, engineering, marketing and business development roles. In 2012 he left the merging El Paso to join forces with Bob Phillips, CEO of Crestwood and previously an El Paso and Enterprise Products top executive. Today Deneke serves as president of Houston-based Crestwood’s natural gas business division. Sincere, energetic and detail-conscious, he spoke to Pipeline & Gas Journal about the company, the commodity and the nature of the business.

P&GJ: What exactly does Crestwood have in its natural gas portfolio?
Our natural gas portfolio includes gas gathering, compression, processing and treating, and with last year’s merger with Inergy, we’re also in the interstate gas transportation and storage business. Our assets are located across the United States, within the heart of virtually every major oil and gas shale play. We have assets in the Bakken, the Powder River-Niobrara and the Monterey Shale play in the western United States; in the central region of the U.S. we’re in the Barnett Shale, the Eagle Ford, Fayetteville, Granite Wash, Haynesville and the Permian Basin; and then of course in the east region we have a very strong position and presence in the Marcellus-Utica shales.
Heath Deneke
We have a network of roughly 1,260 miles of gas pipelines and operate about 380,000 horsepower of compression. We have about 600 MMcf/d of gas-processing capability and another 575 MMcf/d of gas-treating capacity. Most of our interstate gas transportation assets are in the Northeast/Marcellus region where we have about 1.3 Bcf/d of firm transportation capacity. We also have approximately 80 Bcf of underground gas storage, with a little more than half of that in the northeast Marcellus region, and the remainder in the South Texas/Eagle Ford region.

P&GJ: Crestwood is a fairly young company — how has it grown?
We are a fairly young and growing company, but we have a very seasoned management team and a strong partnership with First Reserve Corporation [an energy-focused private equity firm]. We’ve obviously grown fast, but have been able to quickly draw from our experiences and relationships to expand our employee base and organization capabilities to keep pace with our growth. Originally, the company started in the Barnett Shale. [Crestwood CEO] Bob [Phillips] had a 30-plus year career running gas gathering and transmission and processing companies. With his expertise and backing from First Reserve, Crestwood acquired Quicksilver Gas Services LP and its gas gathering and processing midstream assets in the Barnett in October 2010.

From that time forward Crestwood continued to grow as a company primarily through acquisition of assets in the Fayetteville, Haynesville, Granite Wash, Marcellus and Permian, building up critical mass from 2010 through 2012. Year by year and almost quarter by quarter we’ve accumulated a good base of assets, achieving critical mass both operationally as well as in the size of the company. By the end of the first quarter of 2013, we’d grown to be about a $2.5 billion to $3 billion enterprise value company and had established a successful track record of operating and building out our gathering and processing assets in a safe, reliable and cost-effective manner.

But of course in my view, the real game changer for Crestwood was the merger we recently completed with Inergy. It really upped the ante for us on multiple levels.

P&GJ: What changes have come about due to the Inergy merger?
From a financial perspective the merger really elevated Crestwood into what I view as a solid mid-cap master limited partnership. We have a combined enterprise value of roughly $9 billion. The merger provided us with the size, the scale and the access to a lower cost of capital which is important in the midstream MLP space to be able to compete for business.

From an overall business perspective, the merger was a game-changer that broadened and diversified our mix of assets, our overall customer base and the combination of services we’re now able to offer our customers. Crestwood was more of a supply-side producer-focused entity pre-merger with most of our gas and liquids business beginning at the wellhead and ending at the tailgate of the processing plant. The legacy Inergy business on the other hand was more heavily vested with customers on the demand side of the industry, with a sizeable crude and NGL marketing and logistics business and a downstream gas transportation and storage business that largely focused on services from the plant tailgate to the end-user market. The combination of the two companies really extended our portfolio of assets and services across the midstream value chain, connecting the supply and the demand side of the midstream services market for our customers.

When you look at Crestwood today, we handle in excess of 2 Bcf/d of natural gas and approximately 500,000 bpd of NGLs and crude oil for our customers across the United States. That’s a pretty well balanced position in today’s market and sets a strong foundation for future growth.

P&GJ: Are there differences between the Inergy outlook and the original Crestwood mindset?
We are very much aligned both culturally and from a business outlook perspective. That is why we were able to fully integrate the company in such a short time period. Bob leads with a strong emphasis on teamwork and our business divisions and employees from the officer level to the front line collaborate very well. We all understand the value of providing competitive services along the midstream value chain and have rallied around a common growth strategy that is centered on liquids-rich shale play development.

We first started working on the Crestwood-Inergy merger in the January-February 2013 time frame and closed the merger of Inergy’s and Crestwood’s general partner entities in June, followed by the merger of the two MLPs in October. Right out of the gate, Bill Gautreaux [a founding partner of Inergy LP and current president of Crestwood’s liquids and crude business division] and I pulled our teams together and immediately began working on opportunities to grow the business and expand our services with our customers. Literally within a few weeks, our teams were sitting at the same table in front of customers cross-selling our mix of services and capabilities.

While the formal integration process was running its course throughout the year, we closed a large wellhead gas gathering and processing deal in the liquids-rich Niobrara/Powder River Basin play, followed shortly thereafter by an acquisition of a nearby crude-by-rail terminal that happened to be moving crude produced by the same customers from the same oil and gas wells. Shortly after that, we closed on acquisition of the Arrow system, an integrated crude oil, water and gas wellhead gathering system located in the heart of the Bakken Shale in close proximity to our existing Colt Hub crude-by-rail terminal. Most recently, we closed the Willow Lake project in the Delaware Permian basin, which will provide gas gathering, processing, and downstream NGL marketing for producers in southeast New Mexico and West Texas later this year.

I don’t think we would have been as successful implementing the value chain strategy right out of the gate if we weren’t already on the same page. I’ve been through three different mergers over my career and this one really just kind of floored us all. It exceeded our expectations in terms of how quickly we came together as a team and started having successes.

Part of that was [the merger] just made a lot of sense. We all got it and rallied around it. We’re certainly well into it now and that momentum and camaraderie is still there, from the senior leadership team down to the individual staff level. We now have more than a thousand employees beginning to beat to the same drum.

P&GJ: Is Crestwood planning to continue expanding through mergers?
Given our post-merger portfolio of assets we’re certainly less dependent on M&A activity to meet our growth objectives. We have an existing platform across the United States in just about every premier shale play and our service capabilities now extend across virtually the entire midstream value chain. That position in and of itself creates a lot of opportunities for us to grow and optimize our assets organically.

But strategic M&A is going to continue to be a part of our overall growth story. We’re pretty good at finding the right deals and integrating them into our business model. We’ll continue to look for reasonably priced acquisitions that are complementary or synergistic with our existing platform.

P&GJ: What do you expect to see in the next few years in terms of gas prices and demand? Are there any curveballs to watch out for?
I’ve been in the business long enough to know that it’s at best difficult to predict what gas prices will do, especially over an extended period of time. But given the current outlook on gas fundamentals I’m probably in line with most of the industry in that I’d be surprised to see gas prices stay much outside of the $4-5/Mcf range for an extended period, particularly over the next few years.

We certainly have the natural gas resources, and the drilling technology is proven and cost-effective in the current gas price environment. We have plenty of smart people and companies that know how to use that technology in a safe and environmentally responsible way and the capital markets continue to be eager to fund U.S. energy infrastructure development. On the demand side, I expect to see steady increases in domestic gas consumption, driven primarily by gas-fired power generation demand and industrial sector growth. We also expect U.S. LNG exports to overseas markets and cross border gas exports to Mexico to grow rapidly over the coming years, which we feel are important to preserve a healthy and growing U.S. supply and demand balance.

The curveballs could be a significantly adverse change in domestic U.S. energy policy or regulations. Certainly a dramatic downturn or collapse in the U.S. or world economy would curb development. Overall though, I continue to think the basic ingredients are in place for a continued robust outlook for the natural gas business in the United States.

P&GJ: Can you describe your leadership style?
I’m very much a results-oriented individual. As a leader, I try to adapt to the style and tendencies of the people around me to be a more effective coach and lead where needed to accomplish results. Strong and proactive teamwork and communication are very important to me. I tend to set high expectations, and I believe in rewarding people for success while also holding them accountable for results.
I also have to say I’m a very happily married father with three young children, and I’m all in with my family. I’m a true believer in maintaining a healthy work-life balance, and I certainly encourage the people that work for me to do the same. I believe it makes us all more efficient and effective employees in the long run.

P&GJ: Does that apply across corporate leadership at Crestwood?
I think so. Bob sets the tone and pace. We work hard, but we’re all encouraged to go home and spend time with our families at the end of the day. We’d all agree that communication and teamwork across our business divisions and corporate centers are keys to achieving results. We’ve all got to be moving the ball in the same direction to extract the full value that the midstream value chain can provide for our customers, our shareholders and our employees.

I also think we all get the fact that we are not rewarded for our company efforts but for delivering results — whether those are our financial results, operational results, or accomplishing our environmental health and safety objectives. That view is pretty common in my opinion, maybe because Bob’s a lot the same way and surrounds himself with results-oriented people.

P&GJ: Where did you grow up, and what do you like to do when you’re not working?
I grew up in a small town in central Alabama and spent the first half of my energy career working in Birmingham. My wife and I moved to Houston back in March 2007. Pretty easy date for me to remember because we had our first of three children a few months after settling into our Houston home. We enjoy spending time together at home and at the lake with friends and extended family. Our kids are starting to explore all the major neighborhood sports, which is challenging from a logistics standpoint but fun to watch. We travel a few times through the year — hitting the beach and ski slopes at least once a year. I love to hunt and fish and generally enjoy the outdoors whenever afforded the opportunity.

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