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EnLink’s Triple Play Extending Across Oklahoma, Permian, Louisiana

EnLink Midstream, the natural gas gathering/transportation partnership controlled by Devon Energy Corp., is accelerating its services in the Permian Basin and Central Oklahoma as activity strengthens across West Texas and into the Midcontinent. Natural gas demand also is growing, expanding services in Louisiana, management said.

During a conference call to discuss second quarter results last week, CEO Barry Davis said the company was taking advantage of the market opportunities available to leverage its footprint.

“This approach,” Davis said, “can be seen in the recently announced Greater Chickadee crude oil gathering system,” planned for the core of the Permian’s Midland sub-basin, as well as a strategic joint venture formed earlier this month with an affiliate of Natural Gas Partners (NGP) for gas midstream opportunities in the twin Delaware sub-basin.

Greater Chickadee as designed would include more than 150 miles of high- and low-pressure pipelines, with operations as soon as 2017 (see Shale Daily, July 12). The NGP venture initially would expand gas gathering services (see Shale Daily, Aug. 2).

EnLink also has plans to expand Chisholm II, a cryogenic processing plant to service production from Oklahoma’s stacked reservoirs in Central Oklahoma, otherwise known as the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties (STACK), and the South Central Oklahoma Oil Province, or SCOOP.

Once Chisholm II is completed, EnLink would own 775 MMcf/d of processing capacity across Oklahoma’s STACK, SCOOP and Cana Woodford formations.

“The activity and growth the industry has experienced in these areas is truly exciting,” Davis told analysts. “The STACK and SCOOP rank among the most economic basins for producers in the Lower 48 today, and our decision to accelerate the expansion in this area is a result of some outstanding well results and producer plans for the remainder of 2016 and into 2017.”

Chisholm’s expansion is but one piece, he said.

“You start with significant gathering expansions to make sure that you can handle the gas. That works into a need for future processing capacity. That could be Chisholm II or Cana III. They are in-basin. It could also be Oklahoma Express, which would provide not only the processing solution but also effectively a residue gas takeaway solution because the residue gas would then be in North Texas, where we have ample gas takeaway.”
Beyond gas, opportunities exist in the Midcontinent for crude gathering to serve the same acreage that the gas system serves.

Even though commodity prices are stagnant, “volumes have remained strong across key parts of our business throughout the first half of the year, and our major customers have signaled increases in rig counts and production activity in our core growth areas for the back half of the year,” Davis said.

About 95% of EnLink’s contracts are fee-based gross operating margin, with 75% of the cash flows in Texas and Oklahoma segments supported by minimum monthly contracted volumes or firm contracts. The operator has 10,000 miles of gathering and transportation pipelines, 19 processing plants with 3.9 Bcf/d of capacity and seven fractionates with 284,000 b/d of capacity.

The management team has a simple philosophy. “We believe good plays get bigger and better,” Davis said. “The activity and trajectory we are seeing in the STACK and SCOOP region undeniably support that belief.

“Activity in Central Oklahoma remains very high, and results continue to improve as our customers and other operators focus on further delineating the play, extending the bounds of activity and continuing to fine-tune drilling and completion techniques.

“Devon specifically has experienced impressive development results as they execute their STACK strategy. In fact, over the course of the second half of 2016, Devon plans to triple their rigs in the basin exiting the year with six rigs operating on our acreage” (see Shale Daily, Aug. 3).

Devon may oversee EnLink, but the operator has a growing list of clients, part of its “simple strategy of partnering with the right companies in the right places.”

The second focus is a “vision” for the prolific Permian, including a solid drilled but uncompleted well inventory, or DUCs, Davis said.

“DUCs represent a very important strategy for the industry that is rig count neutral and represents the most attractive source of new capital deployment and returns for our producers…We have seen the increased activity in action as rigs increased on our acreage from 10 in the first quarter to 14 today.”

A third piece to the strategy is in Louisiana, where EnLink’s footprint in the demand-driven markets in the Southeast has added diversity to the customer base.

“We saw tremendous strength in volumes this past quarter primarily driven by our systems access to power markets and growing industrial demand,” Davis said. “In fact, we experienced a number of record volume days during June and July and are optimistic about the volumes that will flow in our pipeline system for the remainder of the year.”

Management already has begun to see “positive impacts from increased demand” from liquefied natural gas exports, gas-fired power generation, petrochemical expansions and industrial growth.

“We also reactivated 12 Bcf of storage this quarter on our gas system as part of our plan to expand the capabilities…to better serve our customers who are increasingly looking for alternatives to ensure liquidity and supply security as Louisiana/southern gas demand markets continue to rise.”

The 12 Bcf of storage was reactivated at EnLink’s gas cavern at Napoleonville, with injections beginning in May. EnLink’s Ascension Pipeline Co. LLC in Louisiana also is set to begin operations by next spring (see Shale Daily, Aug. 6, 2014). The 30-mile gas liquids pipeline would connect its Riverside fractionation and terminal complex to Marathon Petroleum Corp.’s Garyville, LA refinery on the Mississippi River.

Undoubtedly, said Davis, the industry is experiencing a “sustained down cycle with less certainty in the capital markets than we would like…” The market uncertainty was a key reason for the venture with NGP -- and more opportunities are seen on the horizon.

“We also think that eventually there is going to be a consolidation, and there is going to be opportunities for us to acquire other assets.”

Based on recent transactions, EnLink has increased its 2016 capital expenditure (capex) guidance to $545-630 million from $445-570 million. Net cash outlay related to consolidated growth capex was cut to $430-515 million from $445-570 million, in part because of NGP’s participation in the Delaware.

The partnership’s net income in 2Q2016 was $3.2 million, versus $55.4 million a year ago. Net cash provided by operating activities fell to $110.5 million from $120.6 million. Operating income declined to $46.4 million from $72.5 million. The general partner reported net income of $1.2 million in 2Q2016, versus $44.6 million a year ago.

Stay up to date on 2Q16 earnings and projections for the remainder of the year withNGI's Earnings Call and Coverage sheet.

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