Whiplash: 2019's Changing Fortunes - Kathryn Downey Miller, CFA February 28, 2019 - EnerCom Dallas
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Whiplash: 2019’s Changing Fortunes
Kathryn Downey Miller, CFA
February 28, 2019
www.btuanalytics.com
info@btuanalytics.com
BTU Analytics
BTU Analytics is a data-driven energy market analytics firm focused on
providing clear and timely information to industry decision makers
• Clientele is spread across private equity, producers, service companies,
power providers, midstream, traders, and marketers
Consulting capabilities include:
• Natural gas, oil, and NGL market analysis
• Infrastructure development analysis
• Producer strategy advisory services
Products:
• Upstream Outlook
• E&P Positioning Report
• Oil Market Outlook
• Natural Gas Basis Outlook
• Henry Hub Outlook Report
• Production Scenario Analysis Tool www.btuanalytics.com
info@btuanalytics.com 2
Volatility: 2019’s New Normal?
Entering Winter
Today
2018/2019
WTI WTI
$71 $55
WTI Midland WTI Midland
($12.85) $0.95
Henry Henry
Waha Waha
$4.60 $2.66
($3.60) ($0.55)
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info@btuanalytics.com 33
Source: BTU Analytics, Bloomberg.
Key Takeaways
• Geopolitical risk returns – Venezuela, Iran, Saudi Arabia, Tweets
all have potential to impact crude market’s precarious balance
• US production growth will be lumpy due to infrastructure timing.
Historical pricing relationships will be change as today’s
bottlenecks ease and new constraints emerge
• Permian Basin dominates US oil and gas production growth in
2019 and beyond, and new infrastructure timing will have
significant pricing implications in 2019/2020
• Peak Appalachia is near, several producers have already grown to
meet FT commitments on new projects and Appalachian gas is
becoming the swing supplier of gas in the US market
• US natural gas demand growth gap approaching as LNG wave one
crests in 2019 www.btuanalytics.com
4
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Breakeven improvement stagnating, but prices do cover
wellhead economics across all major basins
WTI Price vs. Shale Play Wellhead Breakevens
$120.00
$100.00
$80.00
$/Bbl
$60.00
$40.00
$20.00
$-
14
15
16
17
18
19
4
5
6
7
8
l-1
l-1
l-1
l-1
l-1
n-
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Ja
Bakken Delaware Basin DJ Eastern Eagle Ford Midland Basin WTI
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Source: BTU Analytics, Bloomberg. Available on Bloomberg terminals at BTUS .
Global liquids market was long by over 1.5 MMb/d in 2H 2018, leading OPEC and
partners to cut production by 1.2 MMb/d in 1H 2019. These cuts are necessary to
balance global markets as shown by the oversupply once cuts expire in 2H 2019
Global Liquids Supply/Demand Balance
2.5
2.0
1.5
1.0
MMb/d
0.5
0.0
-0.5
-1.0
-1.5
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14
15
15
16
16
17
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18
18
19
19
20
20
20
20
20
20
20
20
20
20
20
20
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
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Source: BTU Analytics’ Oil Market Outlook (February 2019)US/Canadian incremental liquids growth in 2019 could meet all incremental
global demand growth relative to December 2018, necessitating OPEC
production cuts or other supply disruptions for full year 2019
Incremental Global Liquids Demand vs Incremental
Liquids Production*
2.5
2.0
Implied oversupply
without OPEC and
1.5 Russia production cuts
MMb/d
1.0
0.5
0.0
1Q 2019 2Q 2019 3Q 2019 4Q 2019
US/CN Other Demand
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Note: Assumes status quo production from December 2018 i.e. no OPEC/Russia production cuts
Source: BTU Analytics’ Oil Market Outlook (February 2019)Should oil prices fall, US oil plays will be disproportionately impacted based on
a combination of factors including breakevens, transportation costs, and
producer hedging portfolios
Bakken Oil
Permian Oil
1.6
7.0 1.4
1.2
1.0
MMb/d
6.0
0.8
0.6
5.0 0.4
0.2
0.0
4.0 2018 2019 2020 2021
MMb/d
Base Case $60 WTI $50 WTI $40 WTI
3.0 Eagle Ford Oil
3.5
2.0 3.0
2.5
MMb/d 2.0
1.0
1.5
1.0
0.0 0.5
2018 2019 2020 2021 0.0
Base Case $60 WTI $50 WTI $40 WTI 2018 2019 2020 2021
Base Case $60 WTI $50 WTI $40 WTI
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Note: Includes $7.50/bbl of cash leakage to cover corporate costs like SG&A and interest.
Source: BTU Analytics’ Cash Flow Production Tool (July 2018) and BTU Analytics’ Upstream Outlook (August 2018)A buildup of Permian DUCs should allow for accelerated growth once
infrastructure arrives and soften the impact of drilling slow downs expected
throughout 2019
Permian Wells Drilled vs Wells to Sale
7,000
6,000
5,000
# Horizontal Wells
4,000
3,000
2,000
1,000
-
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
DUCs & COBs Wells Drilled Wells Turned to Sale
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Note: DUC = Drilled Uncompleted; COB = Completed on Backlog
Source: BTU Analytics’ Upstream Outlook (January 2019)Rapid development of debottlenecking projects and new pipelines will eliminate
bottlenecks for Permian crude, significantly improving differentials with bottleneck risks
moving to downstream markets
Permian Oil vs Regional Demand and Pipelines
9.0
Proposed Liberty Pipeline or
8.0 reversals from Cushing could add
supply to basin boosting long haul
Potential for
7.0 consolidation
utilization to Gulf Coast.
6.0 of projects
5.0
MMb/d
4.0
3.0
2.0
1.0
0.0
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Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Existing Pipe + Refining EPD NGL Conversion & BridgeTex Expansion
Cactus II EPIC
Gray Oak Permian Gulf Coast Pipeline
Wink to Webster Production Projection (No Constraints or Completion Delays)
Note: Pipeline capacities are based on current design capacities and does not include expansion capacity on EPIC, Gray Oak, PGC
www.btuanalytics.com
of ~935 Mb/d. Also does not include JupiterMLP’s proposed 1 MMb/d pipeline. Does not currently include potential inbound supply from 10
info@btuanalytics.com
Midcontinent
Source: BTU Analytics’ Oil Market Outlook (February 2019)Plenty of Permian pipe has been proposed, and it will be needed to support long term
development from the Permian. New projects will increase connectivity to Gulf Coast
demand and increase the Permian’s sphere of influence
Permian Dry Gas Production vs Takeaway
22.0 Company Pipelines
Capacity Official
Estimated ISD FID
(Bcf/d) ISD
20.0 ONEOK ONEOK West Texas Reversal 0.45 N/A 1/2019 Yes
Kinder/Targa/DCP Gulf Coast Express 1.92 10/2019 10/2019 Yes
Kinder/EagleClaw Permian Highway (PHP) 2.00 3Q 2020 11/2020 Yes
18.0
Targa/NextEra/White
Whistler 2.00 4Q 2020 12/2020 No
Water/MPLX LP
16.0
Tellurian Permian Global Access Pipeline 2.00 4Q 2022 1/2023 No
14.0 Williams Blue Bonnet Pipeline 2.00 4Q2020 N/A No
12.0
Bcf/d
10.0
8.0
6.0
4.0
2.0
0.0
10
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12
13
14
15
16
17
18
19
20
21
22
23
n-
n-
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Ja
Ja
Ja
Ja
Ja
Ja
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Ja
Ja
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Ja
Local Demand Transwestern El Paso
NNG NGPL Eastbound*
Mexico ** Old Ocean & N TX Expansion ONEOK W TX Reversal
GCX Permian Highway Whistler Pipeline
Permian Global Access Dry Gas Production sans Shut-ins/Flaring
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Note: * Eastbound capacity is based on pipeline diameters and maximum daily flows. ** Mexico pipeline capacity is risked by timing of 11
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downstream pipeline bottlenecks in Mexico to connect inbound US supply to demand centers and based on expected outbound Permian flows
Source: BTU Analytics’ Upstream Outlook (January 2019)Marcellus and Utica production growth, once dictated by infrastructure build-out, will
move to become the marginal gas supply in the US and with production dictated by
macro supply and demand factors
BTU Analytics Appalachia Production Forecast
45
40
35
ain ed
nstr
30
C o US Marginal Supply
25 e line
Pip
Bcf/d
20
15
10
5
-
14
16
18
20
22
24
20
20
20
20
20
20
NE Appalachia SW Appalachia Pipeline Takeaway Capacity
12
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Source: BTU Analytics (updated 1/2019)Appalachian producer guidance indicates a shift from rapid growth in
previous years to significantly slower growth in 2019
Average Production Growth YoY and Producer Guidance Actual
50% Production
Growth
40%
30%
20%
10%
0%
COG AR RRC EQT CNX SWN GPOR Average Basin
Growth
-10%
15 - '16 16 - '17 17 - '18 High Case '18 - '19 Low Case '18 - '19
13
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Source: BTU Analytics’ Gas Basis Outlook, Bloomberg production data, investor materials (updated 2/2019)Significant inventory depletion of gas focused shale plays over the next
decade will drive the marginal cost of gas production higher without
continued efficiency improvements
Gas Focused Remaining Locations by Breakeven
20,000
16,000
12,000
8,000
4,000
0
Appalachia SW Appalachia NE Haynesville Cotton Valley Fayetteville
Sub $2.00 $2.00-$3.00 $3.00-$4.00 $4.00-$5.00 Over $5.00 2019-2024 Drilling Forecast
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Note: Assumes futures strip of 12/31/2018; 5-yr wellhead oil average of $50.14/Bbl
Source: BTU Analytics’ E&P Positioning ReportDue to constraints, Permian associated gas has pressured adjacent basins,
depressing prices, and forced supply to compete for limited demand in the
Upper Midwest. However, now new supply is converging on Northern
Louisiana at Perryville
W. C
ana
da
Limited
Demand
Displaced Rockies Market
Appa l a
chia
n
e rmia
P
OK/
a
chi
a l a
Growing p
SCOOP/STACK Ap
ian
Perm
OK
Perm
i an
Permian Perryville
Perm
ia n
Growing
Demand
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Source: BTU Analytics’ Gas Basis Outlook (updated 2/2019)With the start of Midship, MEP and Gulf Crossing will allow increased
flows into Northern Louisiana
Bennington
Tolar
Carthage Perryville
Waha
Katy
HSC
STX
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Source: BTU Analytics’ Gas Basis Outlook (updated 2/2019)Midship capacity will help SCOOP and STACK producers, but congestion
unlikely to be completely alleviated as volumes grow to fill capacity
Oklahoma Capacity Changes in 2019
1.6 1.44 Bcf/d
1.4
1.2
1.0
0.45 Bcf/d
Bcf/d
0.8
0.6
0.34 Bcf/d 0.35 Bcf/d
0.4
0.3 Bcf/d
0.2
0.0
Midship Capacity ONEOK Reversal Pipeline Bottlenecks Volume Growth in 2019 Spare Capacity
www.btuanalytics.com 17
Source: BTU Analytics, Genscape, Updated December 12, 2018 info@btuanalytics.comMore supply can get to Northern Louisiana, but a bottleneck is
emerging in the middle of Louisiana
Bennington
Tolar
Carthage Perryville
Waha
Katy
HSC
STX
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Source: BTU Analytics’ Gas Basis Outlook (updated 2/2019)Flows from Northern LA are creeping towards full utilization.
Expansion projects could add up to 1 Bcf/d of additional corridor capacity, BTU assumes
expansions likely entered service in 4Q2018 or 1Q2019
North LA to South Flows versus Capacity
10.0 100%
8.0 80%
Pipeline Utilization
6.0 60%
Bcf/d
4.0 40%
2.0 20%
0.0 0%
-2.0 -20%
5
6
7
8
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CGT ANR TGP
Trunkline TGT GulfSouth
Acadian Capacity Utilization
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Note: Pipeline capacities based on maximum north or southbound observed flows and compressor station capacities
Source: BTU Analytics, SONRIS, Data as of Dec. 31, 2018The Gulf Coast will continue to play a larger role in the US demand mix, but
‘LNG Gap’ is ahead
Louisiana and Texas Demand
40.0% 1
Exports Drive Shift in US
Demand Dynamics
TX and LA % of Total US Demand
30.0% 9
20.0% 6
10.0% 3
0.0% 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Other Industrial LNG Mexican Exports TX and LA % of US Demand
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Source: BTU Analytics’ Henry Hub Outlook (January 2018)Contact Us: 720.552.8040
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165 S. Union Blvd., Suite 410
Lakewood, CO 80228
BTU Analytics provides data-driven, market-risk assessments and due diligence analysis for acquisitions and divestitures of oil, NGL, and natural gas assets in
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and downstream assets in the face of ever-evolving market conditions.
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