By Kerry Curry — October 1 — Amid all the mergers, acquisitions and joint ventures in oil and gas exploration, production and pipelines that are centered around companies taking advantage of new technologies, an old business sector is experiencing a quiet but significant amount of attention from investors: trains.
“Crude by rail is a hot story,” said Cliff Vrielink, a partner in the Houston office of Sidley Austin and one of the lead advisers for Energy Capital Partners, a New Jersey-based private equity fund that is investing in building, operating and managing rail terminals used to transport crude oil in Texas — a growth area with strong potential as domestic oil production ramps up.
“This company (USDG) has now accessed capital to help it pursue that strategy in a more dramatic way,” said Vrielink. “There is growing need for rail and so the question is, ‘Who is going to build what’s needed?’ USDG is doing that, and this private equity fund is backing the group.”
Pipelines have traditionally been the most common method of transporting crude oil across North America, but with limited capacity, rail’s star has risen as domestic oil production in unconventional shale plays revolutionize energy markets in places such as Texas, Colorado, North Dakota and Canada.
U.S. shale oil production — at 0.87 million barrels a day in 2010 — is expected to rise to 4.17 million barrels a day by 2030. With the rise in production, the volume of crude oil transported by rail has quadrupled in less than a decade, according to the U.S. Surface Transportation Board. And it’s expected to increase significantly in the coming years, the board said.
Building rail terminals to facilitate the transport of crude by rail has several benefits over pipeline construction. Rail cars allow more flexibility on where the crude can be transported. The industry likes both for different reasons. Overtime, pipelines tend to be very economical, while rail is liked for its flexibility.
For the past eight years or so, investors have mainly found domestic energy opportunities by investing in the minerals of key shale plays in North America. Investors into rail assets have now found a new opportunity in the energy sector, Vrielink said.
“People today are saying, ‘Where is the gap in the system that needs to be filled?’ They are saying, ‘It’s the transportation side.’ This (deal) is focused on trying to help fill that gap in the overall energy infrastructure, which is getting crude to market,” Vrielink said.
USDG, with the help of ECP, plans to help fill that gap with the IPO of a newly created master limited partnership. The MLP’s assets consist of a crude-by-rail terminal in Alberta, Canada, which opened in June, and ethanol rail terminals in San Antonio and West Colton, Calif.
“MLPs (master limited partnerships) are great for entities that are operating and generating cash,” Vrielink said. “You can’t really invest capital to build something inside an MLP. It just doesn’t work that way. MLP investors frown on it.”
Energy Capital Partners is providing funding to an upstairs entity developing the projects. Once the projects are developed and operational, then they could reside in an MLP down below, Vrielink said.
“It’s a way to finance the development, which normally you couldn’t do in an MLP, and to take advantage of the MLP structure,” he said.
Vrielink and associate Tim Chandler in Houston provided the lead counsel to ECP. They had assistance from partners Tim Devetski in Houston, Judith Praitis in Los Angeles, Marc Raven in Chicago and Matt Johnson in Chicago, as well as associates Matt Falcone, Lindsay Heyen and Mary Isensee in Houston.
The Sidley team was able to leverage its strong Houston-based energy practice as well as its broad private equity practice to provide ECP with advice regarding its investment.
Sean Wheeler, a partner at Latham & Watkins in Houston, represented USDG in the transaction.