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ON THE COVER


T 8


he U.S. oil and gas industry is in the midst of a renaissance. The perfect marriage of hydraulic fracturing and horizontal drilling has unlocked pre- viously untapped reserves, pushing domestic production in 2012 to its highest level in 16 years.1


While the rising output has benefited exploration and produc- tion (E&P) companies, it also has fueled a demand for pipelines, gathering systems, and processing facilities. For decades, the midstream sector2


responsible for this infrastructure operated in


the shadow of the E&P companies, but in the past seven years, the shale boom has enabled the midstream sector to come into its own.


During 2006–2012, midstream companies invested almost twice the amount of capital they did between 1992 and 2006, thereby increasing the sector’s capital expenditure (capex) intensity rela- tive to that of upstream companies. This investment has been acknowledged by the market, reflected in a threefold increase in


Marcellus Quarterly 2014


midstream companies’ share of total U.S. oil and gas company enterprise value since 2005. The midstream sector is now the third largest sector of the U.S. oil and gas industry, behind su- permajors and large independents. The largest midstream com- pany, Kinder Morgan, with an enterprise value of $110 billion, is the third largest energy company in North America, behind two supermajor oil and gas companies.


The rise of the midstream sector is illustrated by the increase in its company valuations. Nearly 25 midstream companies have an enterprise value in excess of $5 billion, up from seven companies in 2006.


This surge in growth comes at a time when the midstream sector had been expected to enter an era of maturity. After a wave of consolidation that began in the late 1990s, many forecasts pre- dicted U.S. pipelines would be built out by about 2006. Before the shale boom, domestic oil and gas supplies had been in more accessible areas and tied to existing pipeline infrastructure. But now, increasingly high capital investment is being required to con- nect newfound resources with refineries and processing plants.


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