In an industry often built on projects driven by pre-existing relationships, Navigator Energy Services LLC came up with a different approach: If you build it, the customers will come.

Matt Vining, Navigator’s chief commercial officer, told Midstream Business that the company rejected the “traditional model of private equity-backed midstream companies” of “‘Hey, I’m going to go get some money and I’m going to tackle a deal with the same guy I’ve been doing business with for the last 30 years.’

“I think that is a fantastic way to do business, but I just didn’t have that luxury, and so we actually approached it from the opposite [direction]. We started with identification of the intrinsic need and core criteria for a good project, put together a strong concept, and we were fortunate enough to bridge all of the relationship gaps we needed around the project footprint.”

That concept is Navigator’s Big Spring Gateway (BSG) Pipeline system, which is currently under construction in the Midland Basin within Texas’ Permian Basin.

The pipeline system’s design will allow it to transport up to 140,000 barrels per day (bbl/d) of crude oil from the Permian to delivery points near Colorado City, Texas, into the BridgeTex Pipeline operated by Magellan Midstream Partners LP as well as the Sunoco Logisticsoperated West Texas Gulf Pipeline and Permian Express II Pipeline. This “downstream interconnectedness,” Vining said, “was critical to being able to offer customers the greatest number of markets to access for their commodities.

“We believe that this is a franchise position because those outlets provide long-term intrinsic value, and that value proposition exists whether crude is at $40, $10 or $100,” Vining said. “That option, the ability to allocate barrels to multiple physical points, has value long-term, so we’re not just a one-trick pony in the way of a gathering system. This is something we feel will have demand for the long haul.”

Pull of the Permian

Dallas-based Navigator decided to build its crude oil pipeline system in the Permian Basin because “no two areas are created equal, so you had the ability to distill down what the highest quality areas were, and then what attributes in that area would ultimately make a project most successful,” Vining explained.

It also didn’t hurt that more than “90% of the crude was being moved by truck and was underserved from a pipeline perspective,” he said.

“When we looked at the area, we wanted of course to traverse the most economic resource, and in our view the Permian Basin represented, if not the most economic, then a top-tier crude oil resource for a variety of well-documented reasons,” he said. “When you look at the Permian Basin you say, ‘OK, where do I want to be in the Permian Basin?’ … So we looked at a handful of criteria that we thought would be necessary in order for us to be successful and to carve out a competitive advantage.

“The north Midland Basin, which had generally uniform crude quality characteristics and some of the highest performing vertical and horizontal wells, even very early on, and being near an export market in Colorado City, checked enough of the boxes for us that we thought that it was a great place for a project,” Vining said.

The generally uniform crude quality contributed greatly to Navigator’s decision to build in the North Midland Basin as, according to Vining, “the biggest issue in crude oil right now, aside from price, is quality.

“You can only produce what somebody wants to buy, and in almost all cases, the buyer’s a refinery, and they’re only going to buy what they want to run,” he said. “There has to be this longer-term reconciliation from a pricing perspective, where less desirable grades of crude are priced truly based upon the supply and demand for that grade, instead of being priced as a discounted component of the overall blended stream.

“One of the core criteria for the area that we selected was, ‘Hey, is the crude here high-quality, as measured by API WTI [West Texas Intermediate] standards?’ … Because we, at our core, believe that longer-term, high-quality crude grades will continue to be in demand, especially when the infighting begins in a low-price environment across multiple grades,” he said.

Equitable partnership

Navigator received support for its BSG system from private equity and infrastructure investment firm First Reserve, which acquired Navigator in December with an equity commitment of up to $250 million. As the largest infrastructure investment firm globally, First Reserve and its support positions Navigator ideally for growth, both organically and through mergers and acquisitions (M&A), Vining said.

“Part of why we are so excited about the First Reserve partnership is that we live within their infrastructure fund, which is a 15-year fund,” he said. “It’s a brand new fund, $2.5 billion in size, and so it puts us in a very unique position to … take a very pragmatic approach to how to expand the Navigator platform, which could include M&A.”

Existing within First Reserve’s portfolio of companies gives Navigator access to an array of expertise and resources across the spectrum of energy companies, as well as the leverage needed to expand where Navigator’s team sees appropriate opportunities.

“They have a lot of businesses that are invested in the services end of the value chain, as well as the upstream side of the value chain,” Vining said. “What it brings to Navigator is that, while we are warehoused within an infrastructure fund, we’ve got expertise across the energy value chain that can be contributed to what we believe is an already unique management team and help us craft our own strategy and create new entry points into other resource plays, whether it’s with First Reserve portfolio companies or not.”

Suited for the job

Navigator’s management team is well-positioned to thrive under First Reserve sponsorship, considering that everyone comes from a midstream background, but all from different sides of the deal table.

Vining worked in energy private equity for nine years before founding Navigator in 2013 with Bernie Thomas, who has a history of more than 30 years in the industry, in various business development roles with producers, intrastate and interstate pipelines and marketing companies. CEO John O’Shea was a managing director at Tenaska Capital Management after selling Millennium Midstream, which he co-founded, to Eagle Rock Energy in 2007 and 2008. This variety of experience means Navigator’s leadership team has a different perspective on what it takes to succeed during upheavals in the commodity cycle—Vining said the corporate culture at the company is more similar to a company like Facebook or Google than to a traditional large energy corporation, and that’s the way they like it.

“We are a family at Navigator, and thrive on that, where we each wear multiple hats, and we think that gives us a real competitive edge because we can move quickly, together, and be responsive and thoughtful for our customers, especially in today’s commodity market—but always with an unwavering eye toward serving our customers in a manner consistent with the overall strategy of the business,” he said.

However, the ability to act when the timing is right doesn’t mean the time is always right, and Navigator’s leadership keeps the focus on overall goals rather than responding to every market shift.

‘Global approach’

“It’s never weighted toward any one deal,” Vining said, stressing that movements are “always taken with a more global approach. And so I think that we are a little bit different, because we see things not one deal at a time and it has really helped us, specifically in regard to crafting the overall value proposition of the BSG Pipeline system.”

Taking the global approach means Navigator may pass over some chances to expand that look promising, but don’t meet the demands of its customers.

“It always comes back to, at what point are you no longer unique in the solution you’re providing to your customer?” Vining said. “We see lots of projects and lots of dotted lines to everywhere, and very few of those projects ever get done. Timing is always a component, but it’s often the inability to answer the simple question: ‘Does the service I am offering provide longterm, sustainable value for my customer at a competitive cost?’ and unless the market answers the question ‘Yes,’ then all you have are dotted lines. So I think that what you see in the open season represents, for us, a strong vote of confidence by our customers in our long-term value proposition and validation of our strategy.”

How will Navigator know when the time is right to move on a new project or further expansion, then?

“I think what’ll happen is appropriately matched with the needs of our customers,” Vining said. Navigator leadership expects that “a lot of dust has yet to settle in and around the footprint—I think you’re going to see a lot of consolidation on the operator side, and that will present new challenges, new development plans, new opportunities that will still transform the project footprint and its service offerings.”


The Big Spring Gateway Pipeline system planned by Navigator Energy will span Martin, Howard, Glasscock and Midland counties, Texas. Source: Navigator Energy Services LLC

Keeping an eye on customer needs will be crucial during this time, but Vining said, “Most of our customers are well-positioned to weather the storm. It’s going to create an enormous opportunity to further our existing relationships, and with all luck, attract a few new ones.”

Once the BSG system has been completed, the dust has settled and Navigator evaluates whether customer needs justify further expansion, the company will be on the lookout for new and equally tempting opportunities, Vining said, and those may not be located near its current project.

The question, he said, is, “Can you take this same model and thesis and apply it to other areas in the Permian Basin? Yeah, there are some other unique areas that resemble similar characteristics that we found interesting in the north Midland Basin, but in general, we’re not tethered to the Permian.

“Really any resource that resembles the economic equivalence to that of certain areas of the Permian Basin is something that we want exposure to. We’re actively looking at opportunities in other resource plays that when you look at, how many boxes on that core criteria checklist can you check, and see if we can duplicate the model that we’ve created here.”

Planning for growth

If pursuing growth opportunities seems surprising during a downturn, perhaps it shouldn’t. Though producers may be hurting while crude oil prices hover between $40 and $50 per bbl, that very price decline makes crude oil pipelines even more appealing to shippers. Vining said demand for transport on the BSG system has actually increased recently.

“You can find your way to not having to dial in the last nickel or last dime or last quarter when crude is at $100 per barrel, but when crude is between $40 and $50 per barrel, you spend more time investing in how to extract the greatest amount of value you can from your commodity,” Vining said in explanation of Navigator’s January announcement that it would expand its system’s transportation capacity by 55,000 bbl/d from the previous 85,000 bbl/d.

“It’s a little bit counter-intuitive to see an expansion open season in light of the current commodity backdrop, but … at the end of the day, we’re in the customer service business and this decision is driven by our customer response,” he said.

“In order to provide a truly unique service that could incentivize someone to take their barrels off of a truck and put them onto a pipe for a long term, you have to offer a solution that is truly unique. What we have found is that, in being able to provide operators with the low-cost option to the greatest number of high-quality markets, we’ve actually found a greater demand for our services.”

Bernie Thomas, Navigator’s cofounder, told Midstream Business that especially in tumultuous times, producers look for dependable transportation options. The Permian is traditionally underserved by pipelines, and traditional transportation options like trucks are especially vulnerable to everything from low prices and decreased production, leading some crude oil truck drivers to switch to other industries, to bad weather preventing trucks from accessing rural roads. Pipelines, though, provide a higher degree of reliability, Thomas said.

“I’d say another thing that’s been playing into our hands is the severe winter weather the last couple of years in Midland, and the inability of some producers to move their crude out by traditional methods. [Producers] look forward to connecting their production to our pipeline,” he said, “because the weather will not affect the pipeline. Nor will our line be going on vacation or calling in sick. It’s going to be operating 24/7, so especially in this pricing environment, producers are focusing on the cost side of the ledger more than ever.”

While it appears Navigator has found its niche in the Permian for now, Vining said that the company is still “in the first or second inning.”

“We’ve got a lot of growth ahead of us, both with the existing asset and new opportunities,” he said. As new opportunities arise for the company, “we fundamentally believe that Navigator as a whole will—as it looks materially different today than it did even 12 months ago—will look materially different 12 months from now.”

Caryn Livingston can be reached at clivingston@hartenergy.com or 713-260-6433.