MIDLAND, Texas—Midstream gatherer and processor Lucid Energy Group is completely focused on the Permian Basin, but its businesses in the two sub-basin areas are on separate trajectories. It’s got high-growth potential in the Delaware and a mature, consolidating business in the Midland Basin.

The privately held company, backed by EnCap Flatrock, operates in 12 counties and has more than 2 million total acres dedicated to its systems from 80 customer counterparties. It can process 1 Bcf per day and claims a network of 2,200 miles of pipelines.

The company has a new project in the Northern Delaware that it is feverishly working on, said Mike Latchem, president and CEO. Latchem spoke at Hart Energy’s Midstream Texas conference and exhibition in late May. Unquestionably, acquisition and exploitation in the Delaware Basin has delivered Lucid’s recent growth, and these assets are the bright shiny jewels in its portfolio.

The company first planted its flag in the Midland Basin, however.

“We entered the Midland Basin early, and we were able to grow organically in the heydays of 2012 to 2014,” said Latchem. “Then, we turned and worked on converting a growth-oriented business into an optimized operating company.”

That transformation is a case study in the life-cycle of a shale basin, and how companies with fixed assets can adapt to a changing landscape.

Lucid Energy has been involved in the Midland Basin since 2012, and still sees good opportunities for growth. (Source: Lucid Energy, Midstream Texas, 2017) The first horizontal wells in the Midland Basin were drilled on its eastern side in 2009; Lucid entered Sterling, Mitchell, and Erie and Crockett counties in 2012.

“We were a little bit late to the game, but we were still there when the frenzied land grab was going on,” said Latchem. “We were fortunate to get a lot of our organic infrastructure built when many people hadn’t fully bought into the Wolfcamp idea, and the horizontal development was still in proof-of-concept stage.”

After the collapse in commodity prices, producers shifted their strategies. They narrowed their focus to economic drilling and rethought their land positions. By late 2014, producers were emphasizing development corridors in core-of-the-core counties and had shifted their strategies to live with low commodity prices.

Upstream operators honed in on how to make better and more cost-effective wells. “They started to look at cluster fracks, multi-well pads, proper density and lateral lengths. We can see the results in EURs and very directly in first-month production,” said Latchem. Midland producers also began to adopt the two-mile laterals that were already common in the Delaware Basin. “Now, particularly in the southern Midland Basin, we are seeing some wells come on at north of 1,000 Boe per day. “

This close-in examination was brought to bear on the infrastructure side as well—producers began to micro-manage every aspect of development, from power and roads to water resources to gathering, processing and compression activities. Upstream operators now exert constant pressure on midstream firms to push fees down as much as possible.

But fees are only one piece of the puzzle, Latchem said. The quality of operations can be much more impactful for producers.

Lucid determined that it would adapt to the changing business conditions by solving for the most efficient operations possible and optimizing netbacks. It turned its attention to such factors as offering modern deep-cut recovery systems, ensuring high facility run times and efficiently using fuel.

“We’ve been able to achieve greater than 99% mechanical availability on all of our plants, particularly in some of our newer larger plants,” Latchem said. Near-perfect runtimes on compressors keep wellhead pressures low and gas moving. Another emphasis is on limiting flaring and keeping all hydrocarbons on pipe.

Access to markets is a key differentiator that Lucid emphasizes.

“Where we’re taking our producers’ gas has the biggest impact on NPV,” said Latchem. Recently Lucid has been able to take advantage of the basis differentials between Houston and Waha, for example.

“There’s a very delicate decision producers are making that is not just related to fees, but with aligning themselves with the right party in the Midland Basin. It’s more than just the fee, it’s more than just the netback on a contract. It is the netback with all things considered,” he said.

Going forward, Lucid sees a shrinking core in the Midland Basin. Operators are consolidating and greenfield opportunities in the midstream are limited. Without those, growth will necessarily come from acquisitions. Lucid is currently focused on acquiring strategic assets, with opportunities to integrate back-office business functions and consolidate systems.

“We're able to raise money, we're able to compete with MLPs in a consolidation play that's not historically been available to a private-equity backed company,” said Latchem. “I think we see the model changing, and the Midland Basin is going to be the beneficiary of that.”

Peggy Williams can be reached at pwilliams@hartenergy.com.