Whiplash: 2019 s Changing Fortunes

Transcription

1 Whiplash: 2019 s Changing Fortunes Kathryn Downey Miller, CFA February 28, 2019 info@btuanalytics.com

2 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 2 info@btuanalytics.com

3 Volatility: 2019 s New Normal? Entering Winter 2018/2019 Today WTI $71 WTI $55 WTI Midland WTI Midland ($12.85) Waha ($3.60) $0.95 Waha ($0.55) Henry $4.60 Henry $2.66 Source: BTU Analytics, Bloomberg. info@btuanalytics.com 3

4 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 info@btuanalytics.com 4

5 Breakeven improvement stagnating, but prices do cover wellhead economics across all major basins WTI Price vs. Shale Play Wellhead Breakevens $ $ $80.00 $/Bbl $60.00 $40.00 $20.00 $- Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Bakken Delaware Basin DJ Eastern Eagle Ford Midland Basin WTI Source: BTU Analytics, Bloomberg. Available on Bloomberg terminals at BTUS <GO>. 5

6 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 These cuts are necessary to balance global markets as shown by the oversupply once cuts expire in 2H 2019 Global Liquids Supply/Demand Balance MMb/d Q Q Q Q Q Q Q Q Q Q Q Q Source: BTU Analytics Oil Market Outlook (February 2019)

7 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 Incremental Global Liquids Demand vs Incremental Liquids Production* MMb/d Implied oversupply without OPEC and Russia production cuts Q Q Q Q 2019 US/CN Other Demand Note: Assumes status quo production from December 2018 i.e. no OPEC/Russia production cuts Source: BTU Analytics Oil Market Outlook (February 2019) 7

8 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 MMb/d Permian Oil Base Case $60 WTI $50 WTI $40 WTI 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) MMb/d MMb/d Bakken Oil Base Case $60 WTI $50 WTI $40 WTI Eagle Ford Oil Base Case $60 WTI $50 WTI $40 WTI info@btuanalytics.com 8

9 A buildup of Permian DUCs should allow for accelerated growth once infrastructure arrives and soften the impact of drilling slow downs expected throughout ,000 Permian Wells Drilled vs Wells to Sale 6,000 5,000 # Horizontal Wells 4,000 3,000 2,000 1, DUCs & COBs Wells Drilled Wells Turned to Sale Note: DUC = Drilled Uncompleted; COB = Completed on Backlog Source: BTU Analytics Upstream Outlook (January 2019) info@btuanalytics.com 9

10 Rapid development of debottlenecking projects and new pipelines will eliminate bottlenecks for Permian crude, significantly improving differentials with bottleneck risks moving to downstream markets Proposed Liberty Pipeline or reversals from Cushing could add supply to basin boosting long haul utilization to Gulf Coast. Permian Oil vs Regional Demand and Pipelines Potential for consolidation of projects MMb/d Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Existing Pipe + Refining Cactus II Gray Oak Wink to Webster EPD NGL Conversion & BridgeTex Expansion EPIC Permian Gulf Coast Pipeline 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 of ~935 Mb/d. Also does not include JupiterMLP s proposed 1 MMb/d pipeline. Does not currently include potential inbound supply from Midcontinent Source: BTU Analytics Oil Market Outlook (February 2019) info@btuanalytics.com 10

11 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 Company Pipelines Capacity (Bcf/d) Official ISD Estimated ISD ONEOK ONEOK West Texas Reversal 0.45 N/A 1/2019 Yes Kinder/Targa/DCP Gulf Coast Express / /2019 Yes Kinder/EagleClaw Permian Highway (PHP) Q /2020 Yes Targa/NextEra/White Water/MPLX LP Whistler Q /2020 No Tellurian Permian Global Access Pipeline Q /2023 No Williams Blue Bonnet Pipeline Q2020 N/A No FID Bcf/d Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Local Demand Transwestern El Paso NNG NGPL Eastbound* Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 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 Note: * Eastbound capacity is based on pipeline diameters and maximum daily flows. ** Mexico pipeline capacity is risked by timing of 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) info@btuanalytics.com 11

12 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 45 BTU Analytics Appalachia Production Forecast 40 Bcf/d Pipeline Constrained US Marginal Supply NE Appalachia SW Appalachia Pipeline Takeaway Capacity Source: BTU Analytics (updated 1/2019) 12

13 Appalachian producer guidance indicates a shift from rapid growth in previous years to significantly slower growth in % Average Production Growth YoY and Producer Guidance Actual Production Growth 40% 30% 20% 10% 0% -10% COG AR RRC EQT CNX SWN GPOR Average Basin Growth 15 - ' ' '18 High Case '18 - '19 Low Case '18 - '19 Source: BTU Analytics Gas Basis Outlook, Bloomberg production data, investor materials (updated 2/2019) info@btuanalytics.com 13

14 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 20,000 Gas Focused Remaining Locations by Breakeven 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 $ Drilling Forecast Note: Assumes futures strip of 12/31/2018; 5-yr wellhead oil average of $50.14/Bbl Source: BTU Analytics E&P Positioning Report info@btuanalytics.com

15 Due 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. Canada Displaced Rockies Limited Demand Market Appalachia Permian OK/Permian Growing SCOOP/STACKOK Appalachia Permian Permian Perryville Permian Growing Demand 15 Source: BTU Analytics Gas Basis Outlook (updated 2/2019)

16 With the start of Midship, MEP and Gulf Crossing will allow increased flows into Northern Louisiana Bennington Tolar Carthage Perryville Waha Katy HSC STX 16 Source: BTU Analytics Gas Basis Outlook (updated 2/2019)

17 Midship capacity will help SCOOP and STACK producers, but congestion unlikely to be completely alleviated as volumes grow to fill capacity Bcf/d Oklahoma Capacity Changes in Bcf/d Bcf/d Bcf/d 0.35 Bcf/d Bcf/d 0.0 Midship Capacity ONEOK Reversal Pipeline Bottlenecks Volume Growth in 2019 Spare Capacity Source: BTU Analytics, Genscape, Updated December 12,

18 More supply can get to Northern Louisiana, but a bottleneck is emerging in the middle of Louisiana Bennington Tolar Carthage Perryville Waha Katy HSC STX info@btuanalytics.com 18 Source: BTU Analytics Gas Basis Outlook (updated 2/2019)

19 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 % % Bcf/d % 40% 20% Pipeline Utilization 0.0 0% -2.0 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 CGT ANR TGP Trunkline TGT GulfSouth Acadian Capacity Utilization -20% Note: Pipeline capacities based on maximum north or southbound observed flows and compressor station capacities Source: BTU Analytics, SONRIS, Data as of Dec. 31, 2018 info@btuanalytics.com 19

20 The Gulf Coast will continue to play a larger role in the US demand mix, but LNG Gap is ahead 40.0% Louisiana and Texas Demand Exports Drive Shift in US Demand Dynamics 1 TX and LA % of Total US Demand 30.0% 20.0% 10.0% % Other Industrial LNG Mexican Exports TX and LA % of US Demand 0 info@btuanalytics.com 20 Source: BTU Analytics Henry Hub Outlook (January 2018)

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