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For basically all of the Permian Basin’s previous 100+ years of existence, water and natural gas were mostly nuisances, with water disposed of and gas flared as needed. Gas could occasionally make a little money.
My, how things have changed! With the rise of liquefied natural gas (LNG) exports, gas-tapping data centers, and new hope for beneficial use of produced water, this tide is turning. Private equity (PE) dollars are now flowing directly to those former nuisances.
That’s the observation of both participants in this story: Tim Rezvan, equity research analyst at KeyBanc Capital Markets, and Drew Winston, partner with Tailwater Capital.
That Rushing Sound is Gas and Water, Not Oil
Tim Rezvan
Let’s be clear, oil interest is far from dead. But starting in the second half of 2025, Rezvan began telling clients, “The least exciting thing going on in the Permian Basin right now is oil.”
Instead, “It’s about natural gas, it’s about water, and it’s about the upside from data centers and power generation,” said Rezvan.
Why? Well, some think oil is just plain dull right now. “It’s just because you’ve de-risked it,” he said. Rezvan said oil has been made into essentially a “manufacturing process,” while there’s much more uncertainty about everything else. “Waha [gas] prices have predominantly been negative, and we’re pushing over 24 million barrels a day of produced water. We need solutions for that.”
In short, the gas and water investment interest is largely future-oriented. It’s connected with getting more natural gas pipelines to relieve the Waha bottleneck, and new, scalable technology to repurpose produced water for beneficial reuse. Both of those are seen as, when accomplished, adding great amounts of value for investors.
New Lines Are Lining Up
Maturing Permian formations are becoming gassier—higher gas-to-oil (GTO) ratios than ever, and that’s flooding the natural gas side. “So, you can either move the gas, or you can grow in-basin demand [such as data centers]. And it looks like there are initiative to do both,” Rezvan observed.
He listed pipelines currently scheduled to come online in the next couple of years.
Blackcomb, a 366-mile intrastate pipeline designed to transport up to 2.5 billion cubic feet per day of natural gas from the Permian Basin to a terminus near Agua Dulce, Texas, is one.
Hugh Brinson Pipeline is a 442-mile project that will transport natural gas from processing facilities in West Texas to existing pipeline infrastructure south of the Dallas-Fort Worth metroplex.
He added that there is talk of Tallgrass building a pipeline northward to connect the Permian to Tallgrass’s Rocky Mountain Express (REX) line.
More Lines Would Mean Less Back Pressure, More Flow
Adding pipelines can rely on basic physics to increase outflow, Rezvan noted.
Looking at production history, he noted that previous pipeline additions almost automatically added natural gas production, as they “ramped up in lockstep.”
He continued, “What that told us is that there’s a lot of gas from lower-PSI mature wells that can’t fight their way onto the gathering systems.” So, the lower pressure gas can’t get out.
Here’s where physics applies. “As you lower system PSI by adding egress, there’s more gas that can get into the system. I think as people realize the magnitude of the problem; it’s going to take a couple more pipelines to get through this.”
He sees possibly two-to-three more Bcf per day waiting to escape from downhole. “They are trying to get this gas out of the basin.”
Essentially, as some have predicted a slowdown for Permian oil production, gas output will continue to rise due to the increasing GTO ratios. Plus, remaining new inventory is also gassier, so drilling more oil wells will even further increase gas output.
So, investing based on natural gas is natural. But what about water? It’s still mostly a problem except for the 10 percent or so that’s reused for fracturing. Economically and scalably processing it for beneficial reuse—agriculture or municipal water—is still likely a least a decade away.
With depressed oil prices, rig counts have dropped, which means less and less water is used for fracs, increasing the burden on formations already overloaded with saltwater disposal (SWD).
Even with long development times looming, Rezvan sees investors buying into water recycling because it’s becoming almost an emergency. Developers are working harder and faster than ever, and “that is the kind of project that you possibly could see your private equity coming in on. So, the private equity opportunities in the Permian, we believe, will migrate away from the lease and flip model into the other parts of the value chain.” Lease and flip being the traditional way of buying, building, and selling at a profit on the oil side.
In fact, “I think you can make a case 10 years out that this could be the largest natural gas basin in the country,” which would mean it surpassed Appalachia, the current leader.
How It Works: The Eight-Year Flip
Even though the 2015-era business model of purchasing companies to build them up and sell in 3-5 years is over, there’s still a clock ticking on PE investments today—and it’s still about “buy low, sell high,” as with any investment strategy. The new time frame is more like eight years, but today’s volatility presents timing challenges to any prediction of an appropriate cycle.
“One dynamic we’ve seen is that, with these ever shorter, ever more violent price cycles, it’s more difficult to find the right times to enter and exit these transactions,” he said. One dynamic we have seen on different parts of Permian on these deals is assets getting put into continuation funds because they can’t sell them ahead of the fund maturity.”
An online definition indicates a continuation fund can be a private equity vehicle designed to extend the holding period of one or more assets from an existing fund that has reached or is approaching the end of its lifecycle. Its primary purpose is to allow fund managers (general partners or GPs) to maintain control over these assets while providing liquidity options to existing investors (limited partners or LPs) who may wish to exit.
Connectivity Is Key for Tailwater
Drew Winston
When asked if Tailwater focused on any one sector among upstream, midstream, water management or others in the Permian Basin, Drew Winston, partner with Tailwater Capital, quickly replied, “All of the above.”
He continued, eloquently, “If you look big picture, the Permian Basin is really the epicenter of U.S. oil and gas development and innovation. It produces over six million barrels a day of crude oil, around half of total U.S. oil production. And from an investment perspective, since 2020, virtually all the U.S. oil production growth has come from the Permian.”
There’s also the fact that the Permian has become basically a manufacturing zone. “Any time we can leverage big data sets and do things that are repeatable without having to add a lot of resources, it gives us scale as a firm. The Permian is very scalable.”
His conclusion? “All of that creates a really large and attractive opportunity set from an investment perspective.”
The Nuts and Bolts
Okay, so how exactly does Tailwater look at investment opportunities in the Permian? It’s a combination of science and of people overcoming challenges, Winston said.
“At Tailwater, what we’re really focused on is being a solutions provider for operators in the industry,” including upstream, midstream, and produced water. They do leverage their own data and research, but the human element is huge. “Really the ultimate indicator is talking with our partners, customers of our portfolio companies, and our broader relationships in the industry.”
In short, the company is looking for challenges, such as capital or infrastructure constraints, for which they can be part of the solution. Winston explained, “For us, challenges are opportunities. We’re continually mining our network and our data sets to find challenges across the industry. Because if there’s a problem, we think we have the creativity and expertise to find a solution.”
Because Tailwater is already invested in several upstream ventures and midstream companies handling natural gas and water, their ideal situation is “to bring our portfolio companies to the table, and the expertise across the broader Tailwater complex, to arrive at win-win solutions.” Solutions can include additional Tailwater investments or connecting invested companies to work together on a solution.
For Example
The company definitely sees the Permian as a “buy.” In January of this year, the company announced it had acquired a diversified, non-operated leasehold position in the northern Delaware Basin in Lea and Eddy counties. That position covers about 35,000 gross acres and 900 gross wells, more than 97 percent held by production. Operators include Coterra, Mewbourne, Devon, and Matador.
Winston explained the reasoning behind that purchase: “It is a premier, diversified asset base under exceptional operators and as an added benefit a lot of the gas volumes flow into our Producers Midstream system, which is another Tailwater portfolio company. We love opportunities where, as a firm, we’re solving multiple bottlenecks.”
He continued, “The overarching strategy for our non-op practice is to be a capital solutions provider to producers and working interest owners in the basin.”
Being creative in solving issues is part of the fun. “Whether it is working directly with operators or working interest owners, which is what our latest acquisition was more geared to, we can deploy a number of different structures to help finance a given situation, whether that is helping folks participate actively in their working interest or just monetizing their working interest.”
Trust in the operator is vital in a non-op investment, Winston pointed out. It has to be someone who will make every effort to do everything right. “How we generally get comfortable with non-op investments is to be in positions where best-in-class operators are steering the ship on attractive acreage.”
Delivering the Goods
In addition to Producers Midstream, Tailwater has invested in another gas midstream company, WTG Energy. Between the two they have approximately 8,000 miles of natural gas pipe in Texas, delivering Permian natural gas production to customers in residential, commercial, and industrial categories.
Tailwater’s midstream investments also include water, because, “We think water is a critical element of the supply chain for the Permian,” Winston said. Unlike bottlenecked gas, “Produced water has to physically move. If you don’t have responsible water handling that is reliable and efficient, you can’t really produce oil and gas under today’s manufacturing style development practices.”
That’s why they also invested in Goodnight Midstream, whose water pipelines and disposal wells span the Lea County area near Tailwater’s natural gas pipeline. Winston noted, “An added benefit for operators on this system is the hundreds of miles of interconnected pipelines we have allow us to move water around most of the key producing areas in New Mexico.”
The system allows water to be piped to either a disposal well or to be recycled for hydraulic fracturing in another location, he said.
And the big question—are we getting closer to recycling produced water for wider use? Winston said he believes the technology exists but scaling it to handle the 22 million barrels a day produced in the Permian, as well as making its cost comparable with current disposal options, is still in the future.
In Short
To the question of whether Tailwater sees Permian investment prospects as up, down, or sideways, Winston’s enthusiastic answer was “Up.”
He added, “We’re going to bet with our dollars and continue to execute investments in the Permian because we’re really excited about the opportunities in the basin.”
Paul Wiseman
A longtime contributor to PB Oil and Gas Magazine, Paul Wiseman is an energy industry freelance writer.