tph midstream primer
DESCRIPTION
tph MIDSTream primerTRANSCRIPT
-
Bradley Olseny
(713) 333-7693
Differentials and DifferentiationTPH Midstream Sector Initiation
July 7 2011July 7, 2011
**IMPORTANT DISCLOSURES BEGIN ON PAGE 71 OF THIS REPORT**
-
Whats in This Report State of the Midstream Industry Performance Retrospective Crude/NGL Growth Forecast Pipeline Opportunities
Gas Pipelinesp Crude Pipelines out of Cushing, OK NGL Pipelines out of Conway, KS
Storage Opportunities Natural Gas Storage Crude and Products Storage
NGL Value Chain Opportunitiespp Implications of North America as low-cost supplier Eagle Ford, Marcellus, Bakken NGL Discussion Downstream implications of massive NGL growth Many American NGLs wont be consumed by Americans
2
-
Key Midstream Takeaways We have seen a wave of unconventional dry gas activity; the drill bit has now turned to
crude and wet gas.
Gas infrastructure received multibillion dollar investments throughout the 2000s; oil and NGLs did not liquids infrastructure is outdated and theres a lot of work to doNGLs did not liquids infrastructure is outdated and there s a lot of work to do.
Whats old is new again: the US is generally short liquids infrastructure in areas with existing assets; this increases barriers to entry, and gives existing operators a natural edge in bidding for future projects at attractive IRRs. Examples: Marcellus takeaway pipelines existing infrastructure is expanding to take advantage of y p p g p g g
new Marcellus volumes; expansion economics make these projects much more attractive than the pipe newbuilds of the late 2000s.
Cushing, OK expect returns on contracted storage and (non-Keystone) pipelines to the Gulf to be very attractive over extended (5-10 year) terms.
Mont Belvieu TX NGL fractionation is practically an oligopoly and barriers to entry Mont Belvieu, TX NGL fractionation is practically an oligopoly, and barriers to entry are high. NGL fractionation projects are currently being subscribed with 7-10 year take-or-pay contracts with 15%+ unlevered economics.
Eagle Ford gathering and processing kudos to midstream operators for seeing this thing coming years ago well, maybe they didnt, but theres a lot of empty field-level infrastructure that is being ramped up for attractive, often fee-based, IRRs.g p p , ,
Dust off that export dock you dont have to wait for LNG export terminals we can export gas BTUs in NGL form. America is seeing a burgeoning energy export renaissance in NGLs, and we are displacing crude and natural gas imports.
3
-
THE STATE OF THE INDUSTRYSuddenly, buried steel is a lot more interesting
THE STATE OF THE INDUSTRY
4
-
Quite Simply: Its About Differentials DIFFERENTIAL - in the energy industry, this word refers to a price difference
between fungible units of energy.
As the result of a grand cosmic joke, energy is often found where people arent. As the result of a grand cosmic joke, energy is often found where people aren t. When a barrel of oil is produced in western Canada or a cubic foot of gas is produced in the Permian basin, it is not worth very much. Between the wellhead and the final consumer lies the midstream sector.
Geographic differentials demand is limited near most hydrocarbon production Geographic differentials demand is limited near most hydrocarbon production sites. Midstream services include the pipeline to bring hydrocarbons to market.
Seasonal differentials you might produce oil when there is no way to take it off the lease, or deliver gas to a city on a 70 summer day. Midstream provides storage capacity allowing the market to absorb differences in the timing of storage capacity, allowing the market to absorb differences in the timing of production and consumption.
Quality differentials you wouldnt fill your car with crude; similarly, natural gas straight from the well is often dangerous to consume in a home or business. Midstream processes and standardizes many of the hydrocarbons we consumeMidstream processes and standardizes many of the hydrocarbons we consume.
The midstream industry exists in order to reduce differentials, but it also profits from them. As a result of this fact, the midstream sector is dynamic, even when production, prices, supply, and demand are stagnant or even declining (as long as h d ll h )they dont all stagnate together).
5
-
This Aint Your Parents Midstream Industry The midstream industry is in the middle of an unprecedented transformation, a result of
the revolution in North American unconventional resource development
Midstream has historically received less investor attention than E&P and OFS Why? Midstream has historically received less investor attention than E&P and OFS. Why? As a result of declining oil and stagnant gas domestic production in the 1970s-2000s,
midstream assets were often underutilized, and not seen as value-drivers. Oil and gas production from unconventional resource development is increasing
idl d i f t t i l i f drapidly and infrastructure access is no longer a given for producers
Midstream has been largely occupied by small-caps with limited institutional ownership, mainly due to ~50% of sector market cap being partnerships (MLPs) This has begun to change as investor demand has reduced public valuation penalty
for midstream assets housed in a C-corp structure
Lower correlations with commodity prices than E&P and OFS Midstream investments provide leverage to trends that are arguably more durable
and secular than commodity prices (domestic oil/gas production volumes producer and secular than commodity prices (domestic oil/gas production volumes, producer migration to unconventional basins, increased US import/export of oil/gas/NGLs)
Assets historically found inside larger energy companies Asset rationalization by large-cap energy companies has provided a steady stream of
id t M&A t iti th t 10 midstream M&A opportunities over the past 10+ years
6
-
The Midstream Value Chain
Generally riskier approaching the wellhead
Generally less risky approaching point of consumption
1. Proximity to supply increases risk generally speaking, the closer to the wellhead, the higher the dependence on a single basin, single field or even a single well. Demand centers, on the other hand, are relatively stable and immobile over time.
2. Field assets are more likely to have commodity exposure historically controlled by producers, gathering and processing was once effectively an extension of the E&P business. Crude g g p g ygathering services are exposed to the front end of the futures curve, while gas processing is often exposed to gas and NGL pricing.
7
-
Midstream in a Portfolio Correlation of midstream performance to commodities is substantially lower than for
E&P/OFS
Midstream commodity leverage (especially to crude) has markedly increased in the Midstream commodity leverage (especially to crude) has markedly increased in the last decade as a result of two factors:
disproportionate share of commodity-levered (gathering and processing, E&P) midstream IPOs in the late 2000s
i d ti i ti b d i i tit ti l i t increased participation by macro-driven institutional energy investors
Correlation of Daily Returns to Oil Correlations of Daily Returns to Gas
70.0% 50.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0 0%
10.0%
20.0%
30.0%
40.0%
0.0%
10.0%
E&P OFS MLP
2000 2001 2002 2003 2004 2005
(20.0%)
(10.0%)
0.0%
E&P OFS MLP
2000 2001 2002 2003 2004 2005
8
2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011
Source: Bloomberg
-
Midstream Businesses are NOT Toll Roads Contrary to the misleading impression conveyed by prominent TV talking heads and
some research analysts, midstream businesses and MLPs in general cannotaccurately be described as toll roads, (i.e., volumetric businesses with minimal commodity exposure)
Almost every publicly-traded midstream company has margins that are impacted, directly or indirectly, by commodity prices. For example:
Gathering/processing companies often go long the hydrocarbon at the wellhead
Pipelines often sell gas, allocated to them as fuel to operate their pipes
Refined product storage operators can benefit from blending cheaper NGL feedstocks, in effect capturing the spread between blendstocks and gasoline
Gas storage operators charge a fee per mcf per month. Historically, higher gas prices have meant higher seasonal spreads in the gas futures market
T t ti ti it i l t d t d d E t k i li Transportation activity is correlated to gas demand. Even take-or-pay pipelines can earn 10%-15% of total revenues by utilizing the pipes full capacity
NGL fractionators are indirectly levered to liquids prices, as liquids prices determine the amount of drilling rigs targeting dry vs. NGL-rich gasg g g g y g
9
-
But Midstream Businesses are Anchored by Stable Trends Although we find the idea
of midstream = toll road to be overly simplistic, we do not
Refined Products Transportation and Storage MLPs vs. Consumption and Product Prices
250
300
pwant to understate the stability of many midstream businesses.
Long-haul transportation and storage near demand
100
150
200
and storage near demand centers are the most stable midstream businesses, due to proximity to consumers (see table on next page)N t l G T t ti MLP C ti d
0
50
2006 2007 2008 2009 2010 2011
Refined Products Performance RBOB/Diesel 2:1 Price Composite Refined Products Consumption
(see table on next page).
At left, the equal-weighted performance of long-haul natural gas and refined products equities
Natural Gas Transportation MLPs vs. Consumption and Natural Gas Prices
150
200
250
refined products equities illustrates that pipelines have been more stable than the commodities they transport0
50
100
2006 2007 2008 2009 2010 2011
10
Source: Bloomberg & EIANotes: Refined products performance is equal-weight index of BPL, HEP, MMP, NS, SXL, TLLP, TLP;
Natural gas performance is equal-weight index of BWP, EPB, SEP, TCLP
Gas Transportation Performance NG Price NG Consumption
-
Returns Across the Value Chain Gas and NGLsAnatomy of the Natural Gas Midstream Value Chain - Wellhead to Consumer
Gathering Processing Storage - Gas Transportation - Gas Fractionation Storage - NGL Transportation - NGLDescription Networks of small pipelines
(2"-16") take gas from wellhead
Absorption and cryo expansion to extract heavier hydrocarbons (NGLs) from gas stream
Depleted reservoirs and salt dome caverns, located near supply or demand centers
Large-diameter pipes (16"-42"), move gas from field, intra- or interstate
Separates raw NGLs into pure products for use by end consumers
Storage necessary to manage demand shortfalls during routine maintenance at petchem plants
NGLs from field to fractionator or from fractionator to user in 6"-18" pipes. Rail/trucks are alternative purity transport
Supply Gas wells Gathering systems Gatherers or processors in supply Dry gas can come fromgathering; Processing plants supply "Y-grade," RawNGLs fromfield, purity Rawlines take NGLs fromfieldSupply Source
Gas wells Gathering systems Gatherers or processors in supply areas, large pipes in demand areas
Dry gas can come from gathering; residue gas from processing plants
Processing plants supply Y grade, or raw NGLs to fractionators
Raw NGLs from field, purity products from fractionators
Raw lines take NGLs from field to fractionator, purity/batched lines move products to end users
Destination Processing plants and long-haul pipes, sometimes via several larger gathering pipes
Residue natural gas heads to transport pipelines; NGLs head to fractionating facilities
Gas is injected and withdrawn by utilities, aggregators, financial speculators, who ship it to the destinations under "Transportation - Gas"
Local distribution companies, power plants, industrial facilities
Either pipeline, truck, or rail delivers to end user, depending on product (details under "Transportation - NGL")
See "Transportation - NGL" Ethane: ~100% petrochemical Propane: 44% petchem, 41% residential/comm, 7% ag.Isobutane: 79% fuel blending, 21% propellant and otherButane: 85% fuel blending, 15% other
Contract Structure
Without processing, contracts are typically volumetric; rarely take-or-pay/cost of service.Potentially no contractual term fro service, potential multi-year or life-of-lease commitments for a given acreage position.
Keep-whole: (long NGLs, short gas) mainly in low-btu areas but becoming less common;% of Liquids/% of Proceeds: (long NGLs/long NGLs+gas) common in high-btu gas areas;Fee-based: now common as E&Ps want more NGL leverageContracts rare, mkt share relies
Monthly fee, based on variables such as capacity reserved, amount of maximum injection or withdrawal per day, and accessible pipeline interconnects.New contracts approx. 1-5 years
Intrastate and interstate typically have reservation (take-or-pay) component, volumetric usage fee, potential fuel retention (long nat gas) component. Reservation is typically larger % of total fees on interstate, and interstate rates are governed by utility-style regulatory mechanism with periodic tariff reviews.
Typically volumetric fee-based; "frac-or-pay" contracts common in current tight mkt. In certain cases (specialized frac such as butane isomerization, propylene splitting), contract is like percent of liquidsNew contracts approx. 5-10 yrs.
Typically bundled service with fractionation, since NGLs are fractionated at major centralized facilities (as opposed to being gathered from disparate basins), and are typically stored waiting for fractionation or waiting to be shipped from fractionatorContracts approx. 1-4 yrs. if not
Regulated tariffs on interstates. NGL pipes have volumetric fees that adjust with PPI index. Intrastate pipes are typically volumetric and are indirectly influenced by PPI index. Newbuild refined pipes may have LT agreements with major customers, but most pipes
on connects w/ gatherers New contracts approx. 10-20 yrs. bundled. tend to rollover without
Risk Factors
No exploration risk, but other E&P risks - well failure risk, risk from declines and basin economics remain; often liable for downtime and exposed to compressor and fuel costs
KW long NGL and short gas margins are very volatilePOL/POP make processor more like E&P than a "toll road" Fee-based volume risk, but supply more diversified than gathering systems
Fees determined by seasonal spread (futures indicate cost to buy in winter and sell forward in summer). Baseload utilities less sensitive to seasonal spread, but incremental customers typically are financial and "play the spread"
New pipes contracted with long terms, very low-risk; old or marginal pipes have shorter rollovers and often offer discount vs. regulatory rate. Long-term, risks from lower-cost competitors, decline in differential due to excess pipe capacity
Fee-based facilities near demand centers reduces supply risk. Fees fluctuate based on demand for purity products, available frac capacity, and influx of raw NGLs to frac centers
Storage services less valuable during times of low fractionation capacity utilization, due to slack in NGL mkts
Volumetric risks. For raw NGL pipes, risk to basin NGL extraction economics; for purity pipelines to end consumers, exposure to downtime at individual facilities. Long-term, risks from declining differentials due to new competitors and
Possible Risk In rare cases gatherer can Fee-based contract is most Long-termcontracts higher % utility Typically very stable biz; contracted Frac-or-pay provides for a deficiency Often rolled into bundled take-or-pay Take-or-pay provisions can be
Note: TPH estimates of target IRRs do not encompass the full range of IRRs on actual newbuilds, expansions and acquisitions. They are based on discussions with industry
Possible Risk Mitigants
In rare cases, gatherer can negotiate "cost recovery" to reduce vol. risk. Acreage/multi-yr dedications more common
Fee-based contract is most stable available option for processors; some opex pass-throughs are possible
Long-term contracts, higher % utility customers, more connectivitiy with long-haul pipelines is also beneficial
Typically very stable biz; contracted rates most stable, as exempt from reg. review; negotiation can maximize take-or-pay and duration
Frac-or-pay provides for a deficiency fee (approx. 70%-80% of throughput fee) if not used. Location nearby custs support margins
Often rolled into bundled take-or-pay fractionation contracts
Take-or-pay provisions can be negotiated in some cases
TPH Est. IRR Required for New Capex
12%-20% 10%-17% (higher returns required to take
commodity risk)
9%-15% 7.5%-11%(can be higher in case of
expansions; see FERC section)
10%-14% 9%-12%(when offered as a standalone service apart from fractionation)
8%-12%
11
f g p f g f , p q y ymanagement teams and reflect targets
-
Returns Across the Value Chain PetroleumAnatomy of the Petroleum Midstream Value Chain - Wellhead to Consumer
Gathering Storage - Crude Oil Transportation - Crude Oil Refining Storage - Refined Products Transport. - Refined Prods.Description Small pipelines (2"-16") and
trucking services take crude from wellhead to larger pipes
Multi-thousand bbl steel cylinders at pipeline origins and refineries. Often able to blend
d
Large-diameter pipes (16"-30"), move crude from field gathering or import hubs to refineries
Generally considered "downstream." Converts crude into consumable products like fuels, distillates
Storage at refineries and near demand centers to intermediate production w/ seasonal demand
Large-diameter pipes (16"-30"), move crude from refineries
Supply Source
Crude wells Crude gathering lines, gathering trucks; larger terminals serviced b i li d l il
Ports, producing basins Crude pipelines and terminals Refineries Refineries
by pipelines and also rail
Destination Terminals at refineries or origins of long-haul pipes
Ultimate destination for crude is always a refinery; terminals can be on-site at refinery; can also be aggregated at storage hub, blended, then shipped to refineries
Terminal storage hubs are an intermediate destination, refineries are ultimate destination
End consumers via pipelines, barges, truck and rail
End consumers Terminals near demand centers, airports, wholesale locations. From terminals, typically trucked to retail locations
Contract Structure
Gathering most competitive, least contracted segment of chain; competition for
Monthly fee, based bbls of capacity, number of accessible pipeline interconnects, blending
Regulated tariffs on interstates. Have volumetric fees that adjust with the PPI index. Intrastate pipes are
Purchases crude, sells end products
Monthly fee, based bbls of capacity, number of accessible pipeline interconnects, blending services,
Regulated tariffs on interstates. Have volumetric fees that adjust with the PPI index. Intrastate pipes are
takeaway and risk from buying crude at wellhead. Upside for gatherers in futures mkt: when future prices are higher, gatherers can store crudes; when lower, incentive to deliver
services, speed of delivery to pipelines. With current shifts in crude supplies in N. America, blending to meet refinery specs is increasingly valuable.New contracts approx. 3-10 years
typically volumetric and are indirectly influenced by PPI index. New pipes may have LT agreements with major customers, but most pipes tend to rollover without contracts.
speed of delivery to pipelines. With shift in hydrocarbon supply in N. America and changing refinery outputs, blending to meet consumer demand is growing market.New contracts approx. 3-10 years
typically volumetric and are indirectly influenced by PPI index. New pipes may have LT agreements with major customers, but most pipes tend to rollover without contracts.
Risk Factors
Pipeline gathering exposed to risks from declines and basin economics; trucks
On-site terminals at refineries are exposed to refinery's competitive position; terminals
Pipes transporting out of crude basins are exposed to basin economics; possible competition
Highly cyclical and prone to long periods of oversupply with shorter periods of strong profitability and
On-site terminals at refineries are exposed to refinery's competitive position; generally low barriers to
Volumetric risks. For raw NGL pipes, risk to basin NGL extraction economics; for purity pipelines to
have low barriers to entry and depreciate rapidly. Persistent low futures pricing may increase fee/bbl but typically hurts overall
p pat hubs are exposed to supply/demand at hub, which may change with crude supply dynamics (see Cushing discussion below)
p pfrom newbuild pipes
p g p ystrong demand
p g yentry
p y p pend consumers, exposure to downtime at individual facilities
Possible Risk Mitigants
The high risk inherent in crude gathering is mitigated by potential margins from profitable futures sales
Long-term contracts, higher % refinery customers, more connectivitiy with long-haul pipelines is also beneficial
Long-term agreements possible, but generally liquids lines are dependent on S&D dynamics for volume
Refining businesses riskier than midstream businesses, generally not suitable for midstream business model
Long-term contracts, agreements with well-positioned refineries , stable demand (retail vs. wholesale and airports)
Long-term agreements possible, but generally liquids lines are dependent on S&D dynamics for volume
TPH Est IRR 15%-25% 10%-20% 8%-12% 10%-17% 8%-12%
Note: TPH estimates of target IRRs do not encompass the full range of IRRs on actual newbuilds, expansions and acquisitions. They are based on discussions with industry
TPH Est. IRR Required for New Capex
15% 25% 10% 20% 8% 12% 10% 17% 8% 12%
12
f g p f g f , p q y ymanagement teams and reflect targets
-
PERFORMANCE RETROSPECTIVEIts Been a Heady 3 Years
PERFORMANCE RETROSPECTIVE
13
-
Midstream Performance Overview Consistent with the broader market, we have seen a strong recovery in the
midstream sector since the end of 2008
As midstream valuations recovered from the financial crisis, investors spent late 2009 and 2010 moving further out the risk curve, favoring companies with long commodity exposures and cyclical business models.
Specifically midstream companies with liquids (NGL and crude) length have Specifically, midstream companies with liquids (NGL and crude) length have benefitted as NGL and crude prices have performed strongly vs. dry gas.
As the cycle has continued, we have seen consolidations and restructurings drive performance:drive performance:
The majority of all publicly-traded MLP general partners have been consolidated into their respective MLPs at healthy premia.
STR, WMB, and EPs restructurings have driven performance., , g p
Going forward, we prefer exposure to liquids volume growth, rather than prices (fee-based processing/fractionation). We believe the rapid increase in NGL volumes will cause choppiness in NGL prices, but we believe the volume growth trend is durable.
14
-
2009-Present: Taking Stock of a Wild 30 Months Performance since 2008 has been broadly outstanding, with every segment generating >100%
total returns after 18 dismal months.
300
400
(
%
)
0
100
200
Gathering and P i g
Other MLP GPs C-Corp GP
Refined Product MLP
Shippers MidtreamC C
Regulated Gas Pi li
Diversified MLPs Propane and H ti g Oil
T
o
t
a
l
R
e
t
u
r
n
800
GPs have notably outperformed. Investors will need to find alpha elsewhere as the investible universe of GPs has been limited by buyouts/consolidations (buyouts marked with *).
Processing GPs MLPs C-Corps Pipelines Heating OilAlerian Total Return
100200300400500600700800
T
o
t
a
l
R
e
t
u
r
n
(
%
)
-200-100
0
M
W
E
C
Q
P
A
P
L
N
G
L
S
A
T
L
S
W
P
Z
D
P
M
N
R
G
P
*
X
T
E
X
E
P
E
*
B
G
H
*
R
G
N
C
G
E
L
C
P
N
O
C
M
L
P
N
M
M
T
O
O
M
M
L
P
S
U
G
E
T
E
T
L
P
W
E
S
X
T
X
I
C
L
M
T
P
V
G
*
E
R
O
C
T
G
P
H
E
P
B
K
E
P
P
V
R
E
E
P
E
X
L
P
O
K
E
G
L
P
S
G
U
E
P
E
P
B
N
R
G
Y
W
M
Z
*
E
P
D
T
C
L
P
O
S
P
*
N
S
H
B
P
L
M
M
P
W
M
B
O
K
S
S
X
L
P
A
A
E
N
B
H
L
N
D
*
S
E
F
G
P
B
W
P
A
P
U
N
S
K
M
P
S
E
P
T
K
T
R
P
S
P
H
M
G
G
*
C
P
L
P
E
T
P
T
N
H
H
P
G
P
*
U
S
S
*
T
Alerian Total Return MLP GP C C GP Mid t C Cle a otal etu
15
Gathering & Processing
Other
MLP GPs
Refined Product MLPs
C-Corp GPs
Shippers
Propane & Heating Oil
Regulated Gas Pipelines
Midstream C-Corps
Diversified MLPs
-
2009-Present (Continued) Although much of 2009 performance was mean reversion, subsequent outperformance has been driven
by secular growth from leverage to NGL economics (red), dropdowns (yellow), takeouts and corporate actions (green), recoveries from distress (sky blue)
Diversified Refined ProductDiversified Refined Product
100
150
200
250
o
t
a
l
R
e
t
u
r
n
(
%
)
100
150
200
250
o
t
a
l
R
e
t
u
r
n
(
%
)
Gathering & Processing Regulated Gas Pipelines
0
50
EEP EPD OKS PAA KMP ETP
T
o
0
50
TLP HEP BPL MMP SXL NS
T
o
800 200
0
200
400
600
T
o
t
a
l
R
e
t
u
r
n
(
%
)
0
50
100
150
T
o
t
a
l
R
e
t
u
r
n
(
%
)
Propane & Heating OilGroup Average
Alerian Total Return
MWE APL NGLS WPZ DPM XTEX RGNC CPNO CMLP WES EROC PVR HLND* EPB WMZ* TCLP BWP SEP
100
150
200
t
u
r
n
(
%
)
16
Alerian Total Return
0
50
100
SGU NRGY FGP APU SPH
T
o
t
a
l
R
e
t
-
2009-Present (Continued)
Shippers Other
Although much of 2009 performance was mean reversion, subsequent outperformance has been driven by by secular growth from leverage to NGL economics (red), dropdowns (yellow), takeouts and corporate actions (green), recoveries from distress (sky blue)
pp
-100-50
050
100150200250300
T
o
t
a
l
R
e
t
u
r
n
(
%
)
0100200300400500600700
T
o
t
a
l
R
e
t
u
r
n
(
%
)
Midstream C-Corps C-Corp GPs
100
NMM TOO TGP OSP* CPLP USSPQ*
0
CQP GEL MMLP CLMT BKEP EXLP GLP TNH
150
200
250
u
r
n
(
%
)
150
200
250
u
r
n
(
%
)
0
50
100
150
SUG EP WMB ENB SE TRP STR
T
o
t
a
l
R
e
t
u
0
50
100
150
XTXI OKE TKT
o
t
a
l
R
e
t
u
MLP GPsGroup Average
Alerian Total Return200
300
400
500
600
t
a
l
R
e
t
u
r
n
(
%
)
17
0
100
ATLS NRGP* EPE* BGH* ETE PVG* NSH MGG* HPGP*
T
o
t
-
2010-Present: Risk On Trade has Driven Performance Whether financial leverage (GPs) or commodity leverage (gathering & processing), the last 18 months
have been good for risk. While 2009 involved a mean reversion play, emboldened investors were rewarded for moving out the risk curve in 2010.
100
)
020406080
C-CorpGPs/MLP GPs
Gathering and Processing
Midstream C-Corps
Shippers Refined Product MLPs
Diversified MLPs Other Regulated Gas Pipelines
Propane and Heating Oil
T
o
t
a
l
R
e
t
u
r
n
(
%
)
300
Interestingly, the 5 top performers over this period were dividend/distribution cutters during 2008-2009
MLP GPs Processing C-Corps MLPs Pipelines Heating Oil
Alerian Total Return
100
150
200
250
300
t
a
l
R
e
t
u
r
n
(
%
)
-50
0
50
A
P
L
A
T
L
S
E
R
O
C
X
T
E
X
E
P
X
T
X
I
W
E
S
W
P
Z
M
W
E
S
U
G
O
K
E
T
O
O
C
P
N
O
N
G
L
S
C
Q
P
G
E
L
E
T
E
T
G
P
D
P
M
M
M
P
O
K
S
W
M
B
E
P
D
H
E
P
E
N
B
N
S
H
E
P
B
T
K
S
E
N
M
M
T
N
H
C
M
L
P
S
G
U
T
L
P
T
C
L
P
S
X
L
P
V
R
R
G
N
C
M
M
L
P
T
R
P
P
A
A
C
L
M
T
K
M
P
B
P
L
E
X
L
P
N
S
A
P
U
E
E
P
G
L
P
S
P
H
F
G
P
E
T
P
C
P
L
P
S
E
P
N
R
G
Y
B
W
P
B
K
E
P
T
o
t
Alerian Total Return
18Gathering & Processing
Other
Refined Product MLPs
C-Corp GPs/MLP GPs
Shippers
Propane & Heating Oil
Regulated Gas Pipelines
Midstream C-Corps
Diversified MLPs
-
2010-Present (Continued) Commodity-levered names (red), dropdown MLPs (yellow), post-distress (sky blue) and corporate action
stories (green) have generally outperformed
Diversified Refined Product60
60
30
40
50
60
a
l
R
e
t
u
r
n
(
%
)
20
30
40
50
o
t
a
l
R
e
t
u
r
n
(
%
)
0
10
20
OKS EPD PAA KMP EEP ETP
T
o
t
a
0
10
20
MMP HEP TLP SXL BPL NS
T
o
Gathering & Processing Regulated Gas Pipelines
200
250
300
u
r
n
(
%
)
3035404550
u
r
n
(
%
)
0
50
100
150
APL EROC XTEX WES WPZ MWE CPNO NGLS DPM CMLP PVR RGNC
T
o
t
a
l
R
e
t
u
05
10152025
EPB TCLP SEP BWP
T
o
t
a
l
R
e
t
u
19Group Average Alerian Total Return
APL EROC XTEX WES WPZ MWE CPNO NGLS DPM CMLP PVR RGNC EPB TCLP SEP BWP
-
2010-Present (Continued)
Propane & Heating Oil Shippers
Commodity-levered names (red), dropdown MLPs (yellow), post-distress (sky blue) and corporate actions (green) have generally outperformed
50
)
80
)
0
10
20
30
40
SGU APU SPH FGP NRGY
T
o
t
a
l
R
e
t
u
r
n
(
%
)
0
20
40
60
TOO TGP NMM CPLP
T
o
t
a
l
R
e
t
u
r
n
(
%
)
Other Midstream C-Corps
3040506070
t
u
r
n
(
%
)
80
100
120
t
u
r
n
(
%
)
-20-10
0102030
CQP GEL TNH MMLP CLMT EXLP GLP BKEP
T
o
t
a
l
R
e
t
0
20
40
60
EP SUG WMB ENB SE STR TRPT
o
t
a
l
R
e
t
C-Corp GPs/MLP GPsGroup Average
Alerian Total Return100
150
200
250
R
e
t
u
r
n
(
%
)
20
0
50
100
ATLS XTXI OKE ETE NSH TK
T
o
t
a
l
-
2011 YTD Reaching Cruising Altitude Total returns shown below for 2011 YTD performance. GPs and C-corps have outperformed, the
former due to performance by liquids-levered GPs, the latter due to corporate actions (WMB, EP)
Gas storage, propane and shippers have been held back by weak fundamentals and weak results
0
10
20
30
T
o
t
a
l
R
e
t
u
r
n
(
%
)
607080
-10Midstream C-Corps
C-Corp GPs/MLP GPs
Gathering and Processing
Diversified MLPs Refined Product MLPs
Other Shippers Regulated Gas Pipelines
Propane and Heating Oil
Gas Storage
T
Alerian Total Return
0102030405060
T
o
t
a
l
R
e
t
u
r
n
(
%
)
Gathering & Processing Refined Product MLPs Propane & Heating Oil
-20-10
0
S
U
G
E
P
A
T
L
S
O
K
E
A
P
L
X
T
X
I
T
N
H
X
T
E
X
E
R
O
C
W
M
B
T
R
G
P
W
P
Z
W
E
S
T
R
P
E
N
B
E
T
E
M
W
E
S
E
D
P
M
O
K
S
T
O
O
H
E
P
M
M
P
N
G
L
S
G
E
L
E
P
B
E
P
D
C
P
N
O
K
M
P
S
X
L
P
A
A
C
L
M
T
S
G
U
C
M
L
P
N
S
H
C
H
K
M
T
G
P
M
M
L
P
B
K
E
P
B
P
L
E
E
P
S
E
P
T
L
P
N
M
M
E
X
L
P
R
G
N
C
C
P
L
P
P
V
R
E
T
P
S
P
H
T
K
N
S
G
L
P
A
P
U
B
W
P
N
R
G
Y
N
R
G
Y
T
C
L
P
P
N
G
F
G
P
S
E
M
G
N
K
A
C
Q
P
Alerian Total Returns
21
g g
Other Gas StorageGP Holding C-Corps/MLP GPs Shippers
p g
Regulated Gas PipelinesMidstream C-Corps Diversified MLPs
-
2011: Life as a Fairly Valued Sector After perhaps once-per-lifetime returns in 2009-2010, 2011 has seen continued outperformance from liquids-
levered names (red), post-distress stories (sky blue), corporate actions (green), and dropdowns (yellow).
Diversified Refined Product
20
25
1012
5
0
5
10
15
20
T
o
t
a
l
R
e
t
u
r
n
(
%
)
-6-4-202468
10
T
o
t
a
l
R
e
t
u
r
n
(
%
)
Gathering & Processing Regulated Gas Pipelines
-5
WPZ OKS EPD KMP PAA EEP ETP
6
HEP MMP SXL BPL TLP NS
25303540
r
n
(
%
)
4
6
8
(
%
)
-505
101520
APL XTEX EROC WES MWE DPM NGLS CPNO CMLP CHKM RGNC PVR
T
o
t
a
l
R
e
t
u
r
-8
-6
-4
-2
0
2
EPB SEP BWP TCLPT
o
t
a
l
R
e
t
u
r
n
Gas Storage
Group Average
EPB SEP BWP TCLP
4-202468
R
e
t
u
r
n
(
%
)
22
Alerian Total Return
-12-10-8-6-4
NRGY PNG NKA
T
o
t
a
l
R
-
2011: Life as a Fairly Valued Sector-Continued
Propane & Heating Oil Shippers8 12
After perhaps once-per-lifetime returns in 2009-2010, 2011 has seen continued outperformance from liquids-levered names (red), post-distress stories (sky blue), corporate actions (green), and dropdowns (yellow).
-8-6-4-202468
T
o
t
a
l
R
e
t
u
r
n
(
%
)
-4-202468
1012
T
o
t
a
l
R
e
t
u
r
n
(
%
)
Other Midstream C-Corps
SGU SPH APU NRGY FGP TOO TGP NMM CPLP
10
20
30
40
t
u
r
n
(
%
)
40
60
80
t
u
r
n
(
%
)
-20
-10
0
10
TNH GEL CLMT MMLP BKEP EXLP GLP CQP
T
o
t
a
l
R
e
t
-20
0
20
SUG EP TRP ENB SE STR SEMG
T
o
t
a
l
R
e
t
GP Holding C-Corps/MLP GP'S
Group Average
10
20
30
40
50
l
R
e
t
u
r
n
(
%
)
23
Alerian Total Return
-10
0
10
ATLS OKE XTXI WMB TRGP ETE NSH TK
T
o
t
a
-
Midstream Valuations Imply Growth
7.00%8.00%
MLPs are not compellingly cheap, compared to historical yield spreadsMLPs are Reasonably Cheap vs. 10-Year Treasury MLP are Fairly Valued vs. 10-Year Baa Industrial
3 00%
4.00%
1 00%2.00%3.00%4.00%5.00%6.00%7.00%
Cheap
2 00%
-1.00%
0.00%
1.00%
2.00%
3.00%Cheap
Expensive0.00%1.00%
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
AMZ-10 Yr Spread Avg Spread + 1 Std Dev -1 Std Dev
MLP M d t l E i 10 Y AA M iMLP C lli l Ch REIT
Expensive -2.00%
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
AMZ-Baa Spread Avg Spread + 1 Std Dev -1 Std Dev
Expensive
2.00%3.00%4.00%5.00%6.00%
MLP are Moderately Expensive vs. 10-Yr AA MunisMLPs are Compellingly Cheap vs. REITs
Cheap
4 00%
6.00%
8.00%
Cheap
-2.00%-1.00%0.00%1.00%
9
9
5
9
9
6
9
9
7
9
9
8
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
Expensive
0.00%
2.00%
4.00%
5 6 7 8 9
0
0
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9 0
Expensive
1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2
AMZ-REIT Spread Avg Spread + 1 Std Dev -1 Std Dev
24Source: Bloomberg
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
1
AMZ-Muni Spread Avg Spread + 1 Std Dev -1 Std Dev
-
Midstream C-Corp Valuations
3 00%
4.00%
Midstream C-Corps are cheaper than MLPs, compared to historical yield spreadsC-Corps are Reasonably Cheap vs. 10-Year Treasury C-Corps are Cheap vs. 10-Year Baa Industrial
0.00%
1.00%
-2.00%
-1.00%
0.00%
1.00%2.00%
3.00%
Cheap
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%Cheap
Expensive
-4.00%
-3.00%2.00%
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
C-Corp-10 Yr Spread Avg Spread + 1 Std Dev -1 Std Dev
C C F i l V l d 10 Y AA M iC C C lli l Ch REIT
Expensive-7.00%
-6.00%
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
C-Corp-Baa Spread Avg Spread + 1 Std Dev -1 Std Dev
Expensive
C-Corps are Fairly Valued vs 10-Yr AA MunisC-Corps are Compellingly Cheap vs. REITs
1.00%
2.00%
3.00%
4.00%
Cheap-2.00%
-1.00%
0.00%
1.00%
Cheap
-3.00%
-2.00%
-1.00%
0.00%9 0 1 2 3 4 5 6 7 8 9 0
Expensive-6.00%
-5.00%
-4.00%
-3.00%
9
9
9
0
0
0
0
0
1
0
0
2
0
0
3
0
0
4
0
0
5
0
0
6
0
0
7
0
0
8
0
0
9
0
1
0
Expensive
25Source: Bloomberg
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
C-Corp-Muni Spread Avg Spread + 1 Std Dev -1 Std Dev
1 2 2 2 2 2 2 2 2 2 2 2
C-Corp-REIT Spread Avg Spread + 1 Std Dev -1 Std Dev
-
LIQUIDS GROWTHCrude and NGL Volumes are Driving Midstream Opportunity
LIQUIDS GROWTH
26
-
Midstream Growth Will Come from Liquids Supply Shift from dry gas BTUs to wet gas BTUs has been underway for the past 18 months
1 500
US Rig Count by Target NGL Targets Included in Gas Rig Count, Understating Impact of Shift
500
1,000
1,500
We believe that NGL volumes could increase by 700 kbpd by 2015 roughly 25% higher than
0
Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Gas OilSource: BHI
We believe that NGL volumes could increase by 700 kbpd by 2015, roughly 25% higher than current levels. This includes production declines in Gulf of Mexico and mature onshore basins, requiring construction of nearly 1 mmbpd of pipe capacity
This tectonic shift in the composition of US hydrocarbon production presents midstream p y p popportunities throughout the value chain, from upstream (gathering, trucking, processing, storage terminals) to downstream (pipelines, fractionation, storage)
Crude oil/condensate growth will come from Canada, Bakken, Eagle Ford, Permian
NGL h ill f E l F d G i W h P i NGL growth will come from Eagle Ford, Granite Wash, Permian
27
-
Liquids Growth is Going to be BIGForecast Liquids Growth from Eagle Ford and Granite Wash
1,500
2,000
r
r
e
l
s
/
D
a
y
0
500
1,000
2011E 2012E 2013E 2014E 2015E 2016E 2017E
T
h
o
u
s
a
n
d
B
a
r
Eagle Ford Crude Granite Wash Crude Eagle Ford NGL Granite Wash NGL
Although emerging horizontal plays within the basin make estimates more difficult, Permian Basin NGL production could add over 200 kbpd by 2015, by our estimates
Midstream service providers are positioned to participate in that growth from the wellhead to the downstream delivery point The midstream industry has not had a similarly target rich environment in their
Eagle Ford Crude Granite Wash Crude Eagle Ford NGL Granite Wash NGLSource: TPH Estimates
downstream delivery point. The midstream industry has not had a similarly target-rich environment in their (relatively brief) history as a substantial standalone sector.
This wave of growth will not fuel a 2007/08-style boom, when creeping commodity leverage drove rapid growth followed by a cash flow collapse for some midstream companies:
Largely fee-based even in some cases for wellhead services (E&Ps now prefer to retain crude/NGL Largely fee-based, even in some cases for wellhead services (E&Ps now prefer to retain crude/NGL exposure) much less volatile but slightly lower returns through an economic cycle
Increasingly contracted term contracts for processing/fractionation assets, more life-of-lease acreage dedications, minimum volume gathering commitments
7/1/11 NYMEX gas price of $4.32/BTU is well below NYMEX NGL price of over $15.00/BTU, providing huge i i i f E&P d l d deconomic incentive for E&Ps to develop wet gas and crude
28
-
US Liquids Infrastructure is Especially Outdated We believe the midstream industry has a historic opportunity as US
unconventional production becomes wetter and reinvigorates long-stagnant US crude and NGLs production.
The Cushing price dislocation has illustrated that US liquids infrastructure is based on simple assumptions that are becoming antiquated by unconventional production
3 000
3,500
4,000
4,500
5,000
40
50
60
70 Crude/NG
L Po
n
(
b
c
f
/
d
)
Bakken/Permian/Eagle Ford growth is here
500
1,000
1,500
2,000
2,500
3,000
10
20
30
40 roduction (kbpd)G
a
s
P
r
o
d
u
c
t
i
o
0
500
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
)
Gas Production (ex. Federal GOM) Crude Production (Ex. Federal GOM) NGL ProductionSource: EIA
29
-
GAS PIPELINE OPPORTUNITIESRemediating Differentials Between Hubs
GAS PIPELINE OPPORTUNITIES
30
-
US is Long Gas Pipe and Short Oil/NGL Pipe Natural gas differentials have been drastically reduced over the past several
years by three factors: >$60 bn of capital spending since 1996 on large-diameter pipelines Unconventional gas supply (Marcellus gas could reduce imports to NE by up to
6 bcf/d)
Crude oil opportunities from Cushing/WTI dislocation:l h d b d h h 1970s-2000s: US increasingly short crude, current imports 6mmbpd higher
than 1970s. Pipelines from Canada/ports typically terminate at Cushing, OK (NYMEX hub, largest in US)
2000s: pipes prepare for coming wave from W. Canada, but they dont prepare for:prepare for: Bakken (~400 kbpd, operators indicate could reach 1.2 mmbpd by 2015) Eagle Ford crude (~100 kbpd, expected to reach nearly 1 mmbpd by 2015) US government delaying oil sands pipe (TRPs XL)
Cushing now has ~500 kbpd more inbound than outbound capacity. EPD/ETP JV has proposed a Double E pipeline to take 450 kbpd to Houston
Rail as swing capacity: shifting supply basins, Cushing bottleneck have led Kinder Morgan and WATCO, a private rail company, to announce rail projects g , p p y, p jout of Cushing
31
-
2000s: The First Wave of Midstream Spending After a few sleepy decades, the midstream
sector saw sharp increases in spending in the mid-2000s
2008: Peak of the First Wave of the Midstream BoomProjects Debottlenecking Southeast, Importing LNG
The infrastructure boom in the 2000s was a distinct development from projects being developed today:
High regional gas price differentials indicated that US was short long-haul transportation
Primary focus: getting emerging gas supplies LNG, Barnett, Canada, Rockies to demand centers
2000s Saw Revitalization of Midstream Investment$4 $12 Rockies - to demand centers
Northeast, Midwest, Florida via underutilized pipes (Transco, TETCO, Tennessee)
The long haul gas pipeline construction
Gas pipeline data shown
$2
$3
$
$4
$6
$8
$10
$
The long-haul gas pipeline construction boom is over, but expansion projects on existing gas pipelines are expected to provide an average of $5bn per year of spending through 2020
$0
$1
$0
$2
$4
Capex ($bn, left axis)p g g
32
Source: EIA, El Paso
Capex ($bn, left axis)2010-20 Est Capex/Yr ($bn, left axis)Cost per Mile ($mm, right axis)
-
Gas Pipeline Opportunity Set Will Be Smaller After the first wave of conventional gas-focused infrastructure investment in
the 2000s, much of North America is long gas pipeline capacity
Diff ti l h f ll t j h b t lli f H H b i Differentials have fallen across most major hubs, controlling for Henry Hub price decline.
Returns generally protected by take-or-pay contracts, low utilization can still i ll d f i bl hmarginally reduce revenue from variable charges
Tens of billions of dollars of newbuild pipe capacity now, on average, out of the money (i.e., netbacks are worse when shipped vs. sold locally).
Rockies Express (Opal Hub, WY)
Barnett area buildout (W.TX)
Midcontinent Express (E.OK) 10.0% 15.0% 20.0% 25.0% 30.0%
o
f
H
e
n
r
y
H
u
b
p ( )
Florida Gas Transmission VIII (FL)
Ruby (Opal Hub, WY)(5.0%)0.0% 5.0%
D
i
f
f
e
r
e
n
t
i
a
l
a
s
%
33
Average, 2005-2009 Average, 2010-Current
-
Northeast Gas Differentials Persist, Presenting Opportunity New York City Gate differential has persisted at an average >$0.80, increasing
as % of HH price from 12% to 19%
Opportunities to connect nearby Marcellus supply to eastern city gates: Opportunities to connect nearby Marcellus supply to eastern city gates: >$4bn of announced Marcellus opportunities for TGP (EP, $1.2 bn), Transco (WPZ/WMB, $0.6bn), TETCO (SE, $1.75bn)
Expansions are typically offer higher returns than newbuilds, as expansions can leverage existing property rights-of-way and compression facilities
An effective FERC put can offer return upside on expansions while providing downside protection through rate cases
Operators strategy for profiting from the NY differential is in its first phase: Phase 1 (current-2012): plumb Marcellus supplies (TGPs 300 Line, TETCOs
TEAM, Transcos NE Supply Link), move oversupplied Midwest market t d t NJ/NY (TETCO TEMAX j t)eastward to NJ/NY (TETCOs TEMAX project)
Phase 2: move Marcellus gas to markets (TETCOs NJ-NY Expansion, TGPs NE Upgrade, Transcos NE Connector and Rockaway Lateral) and displace Canadian imports (EPs NSD/proposed IGT backhaul TETCOs proposed Canadian imports (EP s NSD/proposed IGT backhaul, TETCO s proposed Algonquin backhaul)
34
-
Phase 1 Marcellus Projects Access SupplyTGP Projects Underway
NJ-NY
TEAM/TEMAX in same corridor
TETCO Projects Underway
Transco Projects Underway
Operator Project In Service Cost ($mm) Capacity (mmcf/d) Supply/Demand Driven?EP 300 Line Expansion 4Q 2011 $660 350 Supply
Transco Projects Underway
EP NE Supply Diversification 4Q 2012 $70 250 SupplyEP NE Upgrade 4Q 2013 $400 636 DemandSE TEMAX/TIME III 4Q 2012 $700 455 SupplySE TETCO Appalachia to Mkt 4Q 2012 $200 190 DemandSE NJ-NY Expansion 4Q 2013 $850 800 DemandWPZ NE Supply Link 2013 $341 250 SupplyWPZ NE Connector 1H 2014 $39 100 Demand
35
WPZ NE Connector 1H 2014 $39 100 DemandWPZ Rockaway Delivery Lateral 1H 2014 $182 647 Demand
Total: $3,442 3,678
Source: public filings, company presentations
-
Phase 2 Marcellus Projects Will Displace Imports Proposed but not-yet filed with FERC are projects to move gas up Algonquin
and Iroquois and displace Canadian gas from New England markets
El Pasos proposed Iroquoisinterconnects could displace 500 mmcf/d by Q4 2014; small backhaul volumespossible w/out compression
NJ-NY
Spectras TETCO has proposed a project to move Marcellus gas up Algonquin Gas to New England markets
36Source: public filings, company presentations
-
Coal-to-Gas Switching Should Drive Southeast Growth Coal-to-gas switching (as detailed in TPHs recent report) has driven large gains
in Southeastern gas demand since 2007. This trend is set to continue:
8.5 GW of announced coal retirements through 2020 (equal to ~1.1 bcf/d of 8.5 GW of announced coal retirements through 2020 (equal to 1.1 bcf/d of demand)
Efficient CCGT power gen running at a 42% capacity factor, outlook for gas demand remains positive
Southeast demographics remain strong:
15%
20%Population Growth, Census 2010 vs. 2000 Source: US Census Bureau
0%
5%
10%
15%
LA MS AL TN SC FL GA NC Southeast US
Despite current softness in Florida gas differentials, Floridas long-term gas market growth should be strong, driven by retirements
Softness due to the recent FGT Phase VIII expansion, a project to feed power demand which was unable to contract final 26% of 820 mmcf/d of capacity
37
-
LIQUIDS PIPELINE OPPORTUNITIESEscape from Cushing and the Mid-Continent
LIQUIDS PIPELINE OPPORTUNITIES
38
-
Well, This is a Conundrum... Volumes chase volumes: as Cushing has grown larger (18.3 mmbbls of shell capacity to be added
between Q1 2011 and 1H 2012, bringing total to 76 mmbbls) and more liquid (see NYMEX volumes below), pipeline operators have treated Cushing as a deep demand market, despite constraints: limited local refinery capacity - 1.1 mmbpd of refining capacity is proximate to Cushing, less than
d f C hi i b d i li itone day of Cushings inbound pipeline capacity lack of access to Gulf Coast largest Houston-Cushing pipeline, Seaway Crude, sits empty. It is
owned by COP (50% owner, along with EPD), whose refineries enjoy the benefit of cheap crude feedstocks at its Midcon refineries (Ponca City, OK; Borger, TX; Wood River, IL)
Cushing Hub, the Pipeline Crossroads of North AmericaCushing Hub, the Pipeline Crossroads of North America
CushingSeaway
KeystoneKeystone
Keystone XL
Ponca City 170 kbpdBorger 146 kbpdW d Ri 306 kb d
Fallacy of composition: industry has increasingly built towards Cushing, assuming that everyone was a price taker at Cushing and nobody was a price maker
Wood River 306 kbpd
Source: CAAP
price taker at Cushing and nobody was a price maker
39
-
Crude Pipelines: Cushing-or-Bust BackfiresDespite record-high storage levels, inflows from oil sands, Bakken,
Permian, and even the Rockies have not sufficiently abated, and have continued to push down WTI pricingp p g
Due to limited Cushing storage, WTI pricing has not been discounted to levels comparable with local Bakken pricing; for western Canadian producers and Permian Basin producers, comparative WTI
$50.00
$60.00
35 000
40,000
m
b
b
l
s
)
pricing is still attractiveCushing Storage vs. Historic Range on Left Axis;
$0 00
$10.00
$20.00
$30.00
$40.00
15,000
20,000
25,000
30,000
35,000 Differential ($/bb
r
a
g
e
a
t
C
u
s
h
i
n
g
(
m
Storage well above historical norms
($20.00)
($10.00)
$0.00
0
5,000
10,000
6/25/10 9/24/10 12/24/10 3/25/11 6/24/11
bl)
C
r
u
d
e
S
t
o
r
2006-2010 Storage Range 2006-2010 Storage Average Trailing 12 Mos. Cushing Storage
LLS-WTI Spread Canadian Sour-WTI Spread Permian-WTI Spread
40
Source: EIA
-
Potential Outlets to the Gulf Coast Transcanadas Keystone projects added 156 kbpd into Cushing, with a planned
700 kbpd extension (XL) to move heavy Canadian crudes from Cushing to Houston markets
Enterprise and Energy Transfers Double E Pipeline would provide the earliest solution, utilizing existing underutilized natural gas pipeline in Texas to enter service before the end of 2012
Alternative projects have been proposed Enbridges Monarch would transport Alternative projects have been proposed Enbridge s Monarch would transport 350 kbpd of light crude to the Gulf Coast. It was re-announced (after being shelved) in September 2010 has been on hold, awaiting a US gov. decision on XL and evaluating the long-term demand for Cushing-Houston transportation
90 000
120,000
150,000
180,000
p
e
r
D
a
y
1,500,000
2,000,000
2,500,000
Reversing Available PADD2-PADD3 Transportation is not Enough to Stabilize the Imbalance
0
30,000
60,000
90,000
B
a
r
r
e
l
s
p
0
500,000
1,000,000
41
To PADD3 Pipeline To PADD3 Barge From PADD3 Pipeline From PADD3 Barge
Source: EIA
-
Well, Where the Heck are those Pipes? XL is technically a separate pipeline for purposes of government approval, has
been protested by environmental groups due to the fact that it will increase US imports of oil sands crude
XL has been delayed by at least a year due to a heavily politicized review process by the US State Dept., which, unless accompanied by a comprehensive national energy policy that uses non-market forces to radically alter US crude slates, will do nothing to change the fact that US crude supply is getting , g g pp y g gheavier and more Canadian
Keystone was approved in 2008 to import 590 kbpd of oil sands crude to Illinois, and is flowing volumes now Reasonable questions: doesnt it make sense to let Transcanada finish Reasonable questions: doesn t it make sense to let Transcanada finish
their project rather than create a bottleneck and distort the price of crude in the largest oil hub in the world?
One more: wont delaying the approval just encourage competitor pipelines who avoid import pipeline status but still ship Canadian crude p p p p p pto the Gulf Coast?
The answers to the former is almost certainly yes, the answer to the second is objectively yes, as non-import competitor pipelines have been announced (see following page)( g p g )
42
-
Handicapping Pipelines out of Cushing We believe that XL will almost certainly be built (eventually), as Transcanada can most likely
modify their pipeline design to make XL technically a non-import pipeline. Given the political climate, it is impossible to predict whether this is a 2013 or 2014 event.
Enbridges (ENB) Monarch project has been on-again off-again for several years ENB indicated Enbridge s (ENB) Monarch project has been on again off again for several years. ENB indicated in January 2011 that the project is close to receiving the anchor shipper commitment needed to make it economically viable. We still think that Monarch is unlikely, after XL and Double E are built.
Enterprise and Energy Transfer have announced a JV (Double E pipeline) to convert existing T i t t t g i li d l i t b ild i li f C hi g t th G lf Texas intrastate gas pipelines and lay new pipe to build a pipeline from Cushing to the Gulf Coast.
InboundPipes Capacity(kbpd) OutboundPipes Capacity(kbpd)Basin 450.0 BPNo.1 175.0Seaway 350.0 Ozark 170.0S h d (S h) 93 3 O 3 0Spearhead(South) 193.3 Osage 135.0CenturionNorth 175.0 PoncaCity 130.0KeystonePipeline 156.0 PAAtoCVR 80.0EOGRailtoStroud 60.0 Borger 59.0Other 133.0 Other 280.0Total Inbound 1 517 3 Total Outbound 1 029 0TotalInbound 1,517.3 TotalOutbound 1,029.0
TPHEstimatedMax.StructuralImbalance: (488.3)
ProposedOutboundLines Likelihood Inservice Capacity(kbpd)"DoubleE"Pipeline ETP/EPD High Q42012 450.0KeystoneXL TRP High 2H2013 700.0
h
43
Monarch ENB
-
Can Trucks or Rail Provide a Release Valve for Cushing? Over the past year, we have seen Cushing inventories at levels approximately 5.8 mmbbls higher than the previous year
(average 16 kbpd of inventory growth)
Rail will contribute to reducing the bottleneck in 1H 2012. Rail involves limited capital and typically less than a year of lead time. It also provides destination flexibility for
shippers. Rail is more expensive than pipelines - $4-$6 bbls from Cushing to the Gulf Coast.pp p p p $ $ g Currently, the nearest rail depot to Cushing is Stroud (~20 miles), where EOG ships up to 60 kbpd of inbound Bakken
volumes on their WATCO-operated rail line. In March 2011, KMP and WATCO announced a project to provide rail takeaway to the Midcon. We expect that this
project could provide up to 70 or 80 kbpd. We doubt that many rail operators will be lured by the Cushing opportunity, when >1mmbpd of outbound pipelines
are scheduled to come online in 2012/13.
Trucking cannot meaningfully reduce the imbalance. Trucks can be employed with minimal lead time and capital, but they are expensive - $9-$11/bbl.
>1,400 trucks would need to be employed full-time to take 100 kbpd out of Cushing. In reality, the local infrastructure (roads, truck racks, etc.) limits trucks to a minor role in offtake.
Trucking industry sources have indicated that hiring truckers on a long-haul route dependent on a volatile commodity spread would require 1+ year term guaranteescommodity spread would require 1 year term guarantees
Despite the current spread, prospect of being long $11 transport in a trade that has historically seen ~$0 differentials is not attractive for producers/marketers.
Bottom Line: Until pipes arrive in late 2012-2013, spread is likely to remain wide
$15 00 l
Cushing-Gulf Coast Spread vs. Costs of Transportation
($5 00)
$0.00
$5.00
$10.00
$15.00
p
r
e
a
d
i
n
$
/
B
a
r
r
e
l
44
($5.00)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
S
p
Rail Cost/Barrel Truck Cost/Barrel WTI-LLS
Source: EIA, TPH estimates
-
Crude Transport Opportunities in the Eagle Ford
Although the lack of a local hub makes the differential difficult to observe, the current lack of crude off-take capacity in the Eagle Ford has forced producers to rely on high-cost trucking takeaway, reducing crude/condensate netbacks.
Large-diameter oil pipelines have recently been announced out of the oil window of the Eagle Ford, with an aggregate capacity of at least 1,130 kbpdby 2014O t Pi li O i i T i C it A h Lik lih dOperator Pipeline Origin-Terminus Capacity Anchor LikelihoodEPD Wilson/LaSalle-Houston 360.0 CHK Under constructionPAA/possibly CHK and Koch LaSalle Co.-Corpus 300.0 CHK HighKMP DeWitt Co.-Houston 300.0 HK HighKoch Frio/Atascosa-Corpus 200.0 None named ModerateMMP/M3 (Private LaSalle/Live Oak-Corpus 180.0 None named
-
Conway to Belvieu The Quiet Cash Machine Mont Belvieu, Texas is home to roughly 36% of total US nameplate fractionation (NGL
separation) capacity and is Americas largest NGL hub. MB fracs typically command the highest fees of any US frac facilities, due to proximity of major petrochemical plants (55 bnlbs/yr ethylene capacity), as well as the large NGL storage caverns nearby.lbs/yr ethylene capacity), as well as the large NGL storage caverns nearby.
Conway, Kansas, is the second-largest NGL pricing hub, with 21% of fractionation capacity, but its lack of local downstream consumers (2.3 bn lbs/yr ethylene capacity) and relative lack of storage capacity makes it a much less liquid hub than Mont Belvieu.
Conway-Mont Belvieu Ethane Price Spread
20%
40%
60%
80%
50
100
150
200 Conway D
iscoc
e
(
c
e
n
t
s
/
g
a
l
)
Co way Mo t elv eu t a e ce Sp ead
D t th li ti t h i l f d t k th i i t id f MB i
(20%)
0%
0
50
6/1/01 6/1/02 6/1/03 6/1/04 6/1/05 6/1/06 6/1/07 6/1/08 6/1/09 6/1/10 6/1/11
ountP
r
i
c
Belvieu 80% Ethane Mix Conway 80% Ethane Mix Conway Discount Avg. Disc. 2001-2008 Avg. Disc. since 2009
Source: Bloomberg
Due to ethanes application as a petrochemical feedstock, ethane pricing outside of MB is prone to substantial volatility, reflecting transportation costs to Belvieu as well as local supply/demand factors.
The differential between Conway and MB has steadily grown as the Conway market has been inundated with new production from the Rockies In November 2008 the Overland been inundated with new production from the Rockies. In November 2008, the Overland Pass Pipeline was placed into service, bringing 140,000 bpd of eastern Rockies capacity online (expandable to 255,000 bpd).
46
-
Conway to Belvieu The End of a Differential?
Differentials are valuable things, and companies will fight to control them sometimes at the expense of the differential.
For the past two years the pipeline capacity from Conway to Mont Belvieu For the past two years, the pipeline capacity from Conway to Mont Belvieufailed to keep pace with the demand for transportation to high-value Gulf Coast markets.
Theres no better cure for an arbitrage than an arbitrage ONEOK, who has There s no better cure for an arbitrage than an arbitrage ONEOK, who has historically provided all takeaway capacity from Conway to Belvieu, allowed the spread to widen, thereby forcing Midcon and Rockies NGL producers without additional transport capacity to MB to take a discount on NGL sales.
In June 2011, DCP Midstream (private SE/COP JV) announced that they would be purchasing COPs Seaway Products pipeline from Cushing to Houston, extending it to Conway and converting it to 150 kbpd of NGL service. This is timed to be in-service by 2Q 2013, before ONEOK completes a 193-kbpd y Q , p pexpansion of their Conway-Belvieu Sterling system (see details later in report).
It is likely that ONEOK and DCP fill capacity on both pipelines, but the golden goose the spread from Conway to Belvieu, will be diminished by a corridor with multiple pipeline operators competing for volumes.
47
-
STORAGE OPPORTUNITIESIntermediating the Seasonality of Supply and Demand
STORAGE OPPORTUNITIES
48
-
Gas Storage: A Quick Primer The need for gas storage is a result of the simple fact that demand is seasonal and supply is not As shown in the illustration below, in the Northeast, winter demand often exceeds the amount of daily
available gas (by as much as 10 bcf/d), necessitating that withdrawals from storage compensate for the shortfall
Holders of storage make money by injecting gas into storage during the summer season roughly April through October and then agreeing to sell that gas in the winter. The futures market places a premium on winter gas based on perceived concerns about a supply shortfall (premiums have fallen see next pg)
23.0Peak Demand
15.0
17.0
19.0
21.0
m
a
n
d
(
b
c
f
/
d
) 6.5 bcf/d shown in illustration based on monthly averages; actual daily peak several bcf/d higher
Withdrawal
Injection
5 0
7.0
9.0
11.0
13.0
N
E
G
a
s
D
e
m
Production near storage locationseffectively lifts this red bar,reducing need for storage
Shoulder SeasonInjection
The development of unconventional shale gas resources drastically reduces exploration risk, to an extent reducing the need for deliverability from storage. It is not uncommon to hear producers say that the
5.0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Dispersion of Monthly Average NE Gas Demand, 2000-10 Historical Monthly Demand (bcf/d) Max. Pipe Capacity Min. Storage Deliverability Needed
Source: EIA, TPH estimates
reducing the need for deliverability from storage. It is not uncommon to hear producers say that the reservoir now serves as storage, due to the low geologic risk associated with incremental production
49
-
Gas Storage: A Casualty of Conventional Wisdom During the 2000s, gas storage construction was overbuilt in the Southeast and
Northeast, driven by the same (ultimately incorrect) macro forecast as gas pipelines:
D d i d LNG d d h i f Dependence on imported LNG expected to reduce the consistency of gas supplies, increase storage demand
Declining domestic supply, increasing power gen and industrial demand would require greater gas deliverability from storage
Increasing dependence on offshore gas would make supply vulnerable to weather-related disruptions
500$5
Projects have Been Focused on NE/SEWhere Shale Production has Exploded
The Golden Goose May Rise Again, but Hes Dead for Now
200
300
400
500
$2
$3
$4
$5 Gulf Coast/N
E St
$
/
m
c
f
then storage buildout, shale, recession reduced seasonal spread
Where Shale Production has Exploded
-100
0
100
-$1
$0
$1
1/1/00 1/1/02 1/1/04 1/1/06 1/1/08 1/1/10
torage Capacity
$
50
6 Mo. Fwd. Sale Margin Avg. 6 Mo Fwd Sale Margin
Source: EIA, Bloomberg
-
Gas Storage Declining Fees, Increasing Capacity Were Not Seeing a Bottom: new gas storage facilities are predominantly high-
deliverability salt-dome caverns, which can deliver gas 7x-10x faster than depleted reservoir storage. Industry sources indicate that new projects since 2005 have increased storage capacity Industry sources indicate that new projects since 2005 have increased storage capacity
by 14%, and deliverability by 44% Lease fees for high-deliverability capacity have declined from approximately $0.25 to
as low as $0.12 per month per mcf
Despite bearish fundamentals the market for high-spec assets has been soaring Despite bearish fundamentals, the market for high spec assets has been soaring 3 high deliverability salt-dome assets on the Gulf Coast sold in 2010, at valuations that
are difficult to square in the current low and declining storage lease rate environmentAcquisition Acquiror Date Annc. Cost ($mm) Capacity (bcf) $/bcf TPHe EV/EBITDABobcat Spectra 7/15/10 $540.0 18.0 $30.00 12.50xTres Palacios Inergy 9/7/10 $725 0 27 1 $26 80 12 41xTres Palacios Inergy 9/7/10 $725.0 27.1 $26.80 12.41xSouthern Pines Plains 12/29/10 $750.0 18.0 $41.67 17.36xExpansion In-service Cost ($mm) Capacity (bcf) $/bcf TPHe EV/EBITDABobcat Expansion 2015 $425.0 28.0 $15.18 8.43xTres Palacios Ph. 3 & 4 2013 $85.5 20.9 $8.69 2.63xSouthern Pines Expansion 2012 $50.0 23.0 $2.17 1.17xAll-In Costs Cost ($mm) Capacity (bcf) $/bcf TPHe EV/EBITDA
In each case, cheap expansion capacity was cited in each case as major motivation behind the deal when incremental high-deliverability capacity is so cheap, it makes it h d t th b tt f th k t
All-In Costs Cost ($mm) Capacity (bcf) $/bcf TPHe EV/EBITDABobcat $965.0 46.0 $20.98 11.65xTres Palacios $810.5 47.9 $16.92 10.85xSouthern Pines $800.0 41.0 $19.51 10.49x
hard to see the bottom of the market
51
Source: public filings, company presentations, TPH Estimates
-
Crude/Refined Products Storage Regulatory mandates and unconventional resource development have
contributed to changes in supply/demand dynamics that are creating opportunities in crude and refined product terminals
Crude: Canadian oil sands and Bakken light crude production have created an
oversupplied situation at Cushing Oversupply has forced the market into contango incentivizing storage of Oversupply has forced the market into contango, incentivizing storage of
crude. Typically, contango is caused by anticipation of future demand; this contango market is caused by extraordinary pressure on the front of the futures curve
We do not believe that the volume of new storage capacity is justified by We do not believe that the volume of new storage capacity is justified by long-term throughput at Cushing
Refined products: Refiners increasing ability to process bottom of the barrel crudes into
li ht d t h d d l f di t d t hil l ti d lighter products have reduced supply of dirty products, while regulations and low natural gas prices have decreased domestic demand for dirty products.
Despite the diminishing market size, increasing exports out of the US and decreased availability of dirty products have given providers of storage, blending and marketing services opportunity to grow their businessblending and marketing services opportunity to grow their business.
52
-
Cushing Storage and the Contango Market Contango describes a state of the futures market when near-term prices are
lower than vs. longer-term prices
Contango can exist due to seasonal demand patterns, but it can can exist also g p ,when there is insufficient capacity to handle deliveries An admittedly simplistic example to help think about Cushing: Grills in January at Home Depot are in contango. HD is paying you to take
the grill away and store it in the garage.the grill away and store it in the garage. You would pay full price if you bought in June. Depending on your familys
discount rate and the amount of junk in the garage, this may or may not be attractive. This is a normal contango market.
At Cushing, its like the Home Depot is getting truckloads of grills every g, p g g g yday, and they are forced to drop the price just to keep inventories from overwhelming the store.
HD has started building new square footage so that they can inventory more grills. E ti th t t thi k f thi HD l ti ill Even granting that customers now think of this HD location as a grill superstore; its still obvious that this is not a sustainable solution.
Bottom line: More storage at Cushing is not the solution; the market needs pipeline offtake to structurally narrow the arbitrage
53
-
Cushing Storage Set to Grow Rapidly in 2011Cushing Contango is a Result of
Insufficient Pipeline Takeaway; Market Incentivizes Storage, but May Not
R fl t L g t N d f St g
Storage Buildout Serves as a Stop-gap Until Pipelines Arrive; Once Cushing
Takeaway Expands, Storage will P b bl B i S lReflect Long-term Need for Storage
8%
10%
Probably Be in Surplus
2 6 2 6 2 6 8.5 8.5
9.3 9.3 9.3 60.0
70.0
c
i
t
y
4%
6%
8 8
10.0 10.0 10.0 10.0 10.0 5.6 5.6
5.6
5.6 5.6 5.6 5.6 5.6
4.1 4.1 4.1
4.1 4.1 5.8 5.8 5.8
2.6 2.6 2.6
2.6 2.6 2.6 2.6 2.6
5.4 5.4 8.5
30 0
40.0
50.0
n
g
S
t
o
r
a
g
e
C
a
p
a
c
0%
2%
14 8 14 8 14 8 14 8 14 8
12.2 12.6 14.2 15.8 15.8 15.8 15.8 15.8
6.5 7.6 8.8
10.0
20.0
30.0
B
a
r
r
e
l
s
o
f
W
o
r
k
i
-2%
2005 2006 2007 2009 2010CL3-CL1Average Contango 2005-2008
12.3 12.3 12.3 14.8 14.8 14.8 14.8 14.8
0.0
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
EEP PAA MMP Vit l S E t i OthAverage Contango 2009-2011
54
EEP PAA MMP Vitol Semgroup Enterprise Others
-
Crude Terminal Opportunities Outside of Cushing
Rapidly increasing Eagle Ford light crude production has created another dynamic that has upended industry expectations
Early 2000s forecasts predicted scarcity of light sweet crude grades Early 2000s forecasts predicted scarcity of light, sweet crude grades Gulf Coast refiners spent billions through the 1990s and 2000s becoming,
on average, the USs highest complexity refineries, capable of handling the worlds heaviest and sourest crudes
TPH estimates that Eagle Ford crude production will increase to nearly 900 kbpd by 2016 Mostly high gravity crude (~API 50), not optimal for the heavy sour
slates of Gulf Coast refineries Although Flint Hills (Koch), Valero and NuStar have announced plans to
refine some of this new crude supply, we expect that much of this high-value crude will be exported or blended into heavier crudes in Houston and Louisiana as the US imports cheaper, heavier crudes for refining
Midstream operators with marine terminals along the Gulf Coast from Corpus Christi (MMP 1-2 mmbbls, NS 1.6 mmbbls, PAA 1.5 mmbblsplanned 4Q 2012) are well-positioned to capitalize on this emerging waterborne crude trade
55
-
Refined Products: Exporting the Bottom of the Barrel Large refineries have reduced bottom of the barrel output by building cokers to produce
higher-value light refined products from heavy crude. Refiners are selling associated heavy product storage facilities, providing M&A opportunities for smaller midstream operators.
H i l i l d h G lf C i h 18 h Heavy terminal transactions completed on the Gulf Coast in the past 18 months: 1.8 mmbbls of storage in Mobile, Alabama purchased by NS in May 2010 for $25/bbl
544 mbbls of storage in Channelview, Texas bought by NGLS in March 2011 for $50/bbl
New 7 8-mmbbl terminal on Houston Ship Channel announced operational 1H 2013 New 7.8-mmbbl terminal on Houston Ship Channel announced, operational 1H 2013
The withdrawal of refiners from the storage market presents opportunities for independent storage providers and marketers NS and GEL are active marketers with terminal operations. NGLS is evaluating heavy product terminalling as a potential business segment.
0
500
1000
e
l
s
p
e
r
D
a
y
US Residual Production by Grade vs. Net US Imports
(1000)
(500)
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
T
h
o
u
s
a
n
d
B
a
r
r
e
56
1% Sulfur Net Imports 6 Mo. Trailing Avg
Source: EIA
-
NGL OPPORTUNITIESProfiting from the Dry Gas Price Dislocation
NGL OPPORTUNITIES
57
-
North America Moves Down the Energy Dispatch Curve The unconventional resource revolution has transformed the North American gas
market. Even if the US has not yet figured out how to fully capitalize on our novel position as a low-cost energy supplier (as evidenced by overflowing gas storage, shale moratoria, and other head-scratchers), the changes it has brought and will bring to , ), g g gour economy are profound.
The good news is that North American midstream operators are uniquely positioned to benefit from a wide array of these changes.
We believe that the true game-changing opportunity for the midstream industry is the price dislocation between wet and dry BTUs of energy
140%
U
Nat Gas and NGL Prices per BTU
C t d ti f 86%
Most Pressure on Light NGLs: Non-Blendstocks with Limited Trade
60%
80%
100%
120%
W
T
I
P
r
i
c
e
p
e
r
B
T
U Cost reduction of lighter NGLs driven
by gas supply 61%
86%
64%
30%40%50%60%70%80%90%
U
S
P
r
o
d
u
c
t
i
o
n
0%
20%
40%
Natural Gas
Ethane Propane Butane Isobutane Natural Gasoline
A
s
%
o
f
W
0%11% 12% 9% 6%
0% 1%
-3%
5%
-4%
0% 0%
-10%0%
10%20%
Ethane Propane Butane Isobutane Natural Gasoline
A
s
%
o
f
58
Gas Gasoline2000-2007 2010-2011
Imports, 2000-2009 Imports, 2010-2011 YTDUsed as Refining Blends
Source: Bloomberg, EIA
-
NGL Primer: How Do NGL Recoveries Affect Netbacks? Basins are like a box of chocolates, so theres no rule of thumb for netbacks. US
average is 2 gallons per mcf (GPM). Gas associated with oil production can be 10 GPM, increasing netbacks by >100% vs. selling the gas at its dry gas value.
"A " A i M f f G P i N tb k"Average" American Mcf of Gas Price NetbackFrom the wellhead
1.123 mmbtu of gas $4.32 $4.85Processed Components
1.000 mmbtu of dry gas $4.32 $4.320.123 mmbtus of NGLs1.410 gallons of NGLs % of NGL Bbl $ per mmbtu1.410 gallons of NGLs % of NGL Bbl $ per mmbtu0.601 gallon of ethane $0.75 $0.45 42.7% $10.200.399 gallon of propane $1.52 $0.61 28.3% $16.600.103 gallon of butane $1.73 $0.18 7.3% $16.750.127 gallon of isobutane $1.97 $0.25 9.0% $20.820.180 gallon of natural gasoline $2.45 $0.44 12.7% $22.30
Total Netback for Gas and NGLs $6.24 100.0%Increased Netback Under Current Pricing 28.7%
Eagle Ford "NGL Window" Gas Price NetbackFrom the wellhead
1.386 mmbtu of gas $4.32 $5.99Processed Components
1.000 mmbtu of dry gas $4.32 $4.320 386 b f NGL0.386 mmbtus of NGLs4.500 gallons of NGLs % of NGL Bbl $ per mmbtu2.295 gallon of ethane $0.75 $1.72 51.0% $10.200.945 gallon of propane $1.52 $1.43 21.0% $16.600.315 gallon of butane $1.73 $0.54 7.0% $16.750.315 gallon of isobutane $1.97 $0.62 7.0% $20.820 630 gallon of natural gasoline $2 45 $1 55 14 0% $22 30
59
0.630 gallon of natural gasoline $2.45 $1.55 14.0% $22.30Total Netback for Gas and NGLs $10.18 100.0%
Increased Netback Under Current Pricing 70.0%
Source: EIA, company press releases, TPH estimates
-
Wet Shale Gas: Game-Changing for the American Economy The unconventional resource revolution has transformed the North American
gas market. Even if the US has not yet figured out how to fully capitalize on the novel position of being a low-cost energy supplier (as evidenced by overflowing gas storage shale moratoria and other head-scratchers) the changes it has gas storage, shale moratoria, and other head scratchers), the changes it has wrought in our economy are profound
Oil and gas are not directly fungible (i.e., a gasoline-powered car cannot run on natural gas), which is the main reason for the price disparity between the two. Th t b tit t l t b d t f hi h t il There are ways to substitute lower-cost gas byproducts for higher-cost oil byproducts, effectively increasing the demand for wet gas:
Ethylene, the most widely produced plastic feedstock, can be produced from ethane or propane, or from crude byproducts like naphtha and gas oil, ll i h i l i l i h l i f allowing petrochemical companies to exploit the low price