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Water services sector gears up for rapid growth

More infrastructure will be needed to offer water solutions to shale operators as trucking of supplies becomes less efficient

The US oilfield water services sector is expected to grow over the next few years as it deals with ever-increasing demands for frack water sourcing as well as takeaway options in the country's major shale basins.

While a number of water-focused players have already built out a number of pipelines, disposal wells, recycling projects and other facilities to provide water solutions to operators, more infrastructure will be needed, experts said at the Oilfield Water Finance conference in Houston last week.

For example, in the prolific Permian basin of Texas and New Mexico, where water cuts are especially high, produced water volumes could grow up to 92%, or as high as 12.5 billion barrels per year by 2028, according to B3 Insight president Kelly Bennett.

"That's a really significant amount and the industry is really going to have to adapt to using it," Bennett said.

"Even if we were able to derive 100% of our frack water needs from recycled water, there is still no less over the long term than a little over 8 billion extra barrels being produced annually in the Permian that have to get managed.

"That's a discussion of scale, but it also illustrates why there's so much opportunity to build these systems, to innovate and integrate the different companies across the space, and really innovate and adapt some business models," Bennett added.

Structurally, the industry is beginning to more closely resemble the midstream sector than the services sector, Bennett and others said at the conference.

"You see an opportunity to invest at a blended service and midstream valuation with the promise, because of all that growth, to exit on a more midstream-style exit," Bennett said. "We think in the last phase of that investment cycle... you have a tremendous amount of investment that happens through these re-capitalisations to get these companies where, from a scale standpoint, from an operational standpoint, from a management standpoint, they look a lot more like a conventional large midstream player."

Peter Bowden, global head of energy at Jefferies, echoed Bennett's comments, saying he has seen water players enter contracts that are the traditional hallmarks of midstream agreements.

"We are seeing 10-year contracts, we are seeing fixed-fee contracts, we are seeing acreage dedications, we are seeing (minimum volume commitments)," Bowden said.

Outside the Permian, the transition to a midstream-style business is also evident. Brad Morgan, chairman of Expedition Water Solutions, a Rockies-focused saltwater disposal well operator that was founded in 2013, said he has seen a greater demand for water pipelines over the past few years as operators have been performing larger fracks and as there is a greater push from regulators and communities to get trucks off the road.

"Every conversation we're having with every customer who (is) contracted long-term is to move to pipe," Morgan said.

“There isn't a customer that we're talking to that isn't talking about moving to pipe."

In the Bakken play in North Dakota, where the water cuts are not as high as in the Permian but drilling activity is highly concentrated, there is also a need to move to pipe, Goodnight Midstream chief financial officer Andrejka Bernatova said. The company operates water pipelines and disposal sites in the Bakken, the Eagle Ford shale of Texas and in the Permian.

"Trucking is just not sufficient," Bernatova said.

The anticipated growth of the oilfield water sector is also expected to reveal itself through consolidation over the next few years.

A number of deals have already taken place, including private equity firm TPG Capital's purchase of a majority stake in Goodnight earlier this year, as well as Waterbridge Resources' acquisition of the produced water assets of Concho Resources in the southern portion of the Delaware sub-basin earlier this year.

More recently, Singapore's sovereign wealth fund GIC took a minority stake in Waterbridge.

John Shepherd, vice president of Infrastructure at Select Energy Services, told Upstream on the sidelines of the conference that the current pace of the market indicates a "land grab" phase, with small packages of assets or producer-owned systems changing hands.

"To me, we're not quite at that point where I would expect to see consolidation," Shepherd said.

Bowden expects that eventually many private water operators will either go public or end up in the hands of larger public companies.

"Because if you believe the volumes that I put up, you're going to need that kind of long-term support to prosecute against the long-term opportunity," Bowden said.

"As much success as we've had raising private capital, it does reach its limits and eventually we all need to function in the public markets."

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