With the sector weaving through the downturn’s stormy skies like a nimble fighter jet trying to reacquire a target, it might be time to remember that, before the dawn of the iPhone, midstream wasn’t cool.

The shale boom was still the stuff of bedtime stories for George Mitchell’s great-grandkids in those dreary days of the mid-2000s, and onshore oil and gas activity in the U.S. was well into its second decade of decline. A midstream asset was politely referred to as “mature,” a low-growth link in the value chain, and large integrated companies were divesting them or spinning them off.

Which explains, from the midstreamers’ point of view, why the revolution started without them.

“The combination of under-investment, disaggregation and a move toward entities that were intended to focus on harvesting the cash flow of mature assets meant that many participants were not equipped to capitalize on the investment opportunities created by the shale revolution,” wrote KPMG LLP experts in a report, “Building the Midstream Company of the Future.” Many of the companies in the sector were small and unable to fund major capital investment, and many others simply lacked the internal capabilities like project management, risk management and business development necessary to leap into the fray.

But with the initial boom in the rearview mirror, companies are preparing for the next cycle.

“As you look at what companies are really going after during this time, it’s a lot of expanding capabilities,” said Brandon Beard, KPMG partner, financial due diligence, during a recent webinar discussing the report. “They are trying to acquire the people and the project pipeline that you need to go into new areas of the country or to gain new capabilities.”

The ready availability of debt financing creates an M&A friendly environment, he said. “Particularly in 2015, we see M&A continuing to increase in deal volume and in average size per deal, despite the short-term downturn.”

That said, KPMG’s strategists warn that neither consolidation, in and of itself, nor organic growth represent an effective long-term business strategy. They argue that what is needed to respond to what a presentation from The Williams Cos. called a “once in a generation industry super-cycle” is a series of actions that will result in a differentiated set of assets and capabilities.

An example is the acquisition last year of Oiltanking Partners LP by customer Enterprise Products Partners LP. Beard pointed out two strategic elements of that deal:

  • It broadened Enterprise’s midstream services by giving it access to waterborne markets; and
  • It reduced the company’s risk by taking control of a critical partner.

Enterprise managers “filled in a particular gap in a particular value chain to make them even more effective,” said Chris Click, KPMG’s principal, oil and gas strategy lead, during the webinar. But value chain isn’t the only option, he said. Other companies have taken a geographical approach to M&A, instead of simply using the tactic as a way to get larger.

MarkWest Energy, for example, leveraged its experience in the natural gas and NGL areas to develop a premier position in the Marcellus and Utica plays, then capitalized on its strong customer relationships in those plays to establish a presence in the Permian and other basins.

“We think midstream has a bright future leading to purposeful growth,” said Andy Steinhubl, KPMG principal and energy and natural resources strategy practice lead, who moderated the webinar. But only for those companies that make the right moves.

“To capitalize on the opportunities facing the industry,” KPMG authors wrote in their report, “companies need a dedicated focus on building advantaged capabilities, making the right business model choices and adaptations, and creating operating model flexibility to create sustainable, long-term competitive advantage.”

Joseph Markman can be reached at jmarkman@hartenergy.com.