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Noble Midstream Bringing Online Three CGFs by Midyear, Looking to Expand Advantage Pipeline

Noble Midstream Partners LP is on target to bring online the first of three central gathering facilities (CGFs) it has planned for 2018 beginning in mid-March, including two that would be located on company sponsor’s Clayton Williams acreage in the Permian Basin’s Delaware sub-basin in West Texas, COO John Nicholson said Tuesday.

Noble Midstream plans to bring the next two CGFs online at a pace of about one per month. The two additions in the Delaware sub-basin would bring the partnership’s total oil and gas gathering and compression capacity in the area to 115,000 boe/d and 240,000 barrels of water/day, respectively.

Total oil and gas gathering capacity is expandable to 160,000 boe/d and 300,000 barrels of water/day with modest additional capital investment, Nicholson said on a call to discuss fourth quarter 2017 earnings.

“The collective efforts over the last year have been transformational. We've added significant scale, captured more of the value chain and materially increased customer diversification,” Noble Midstream CEO Terry Gerhart said. “We've spent significant time ensuring that we have the right resources, capabilities and people in place to cover our plan for the year.”

Noble Midstream anticipates spending between $485 million and $535 million in capital supporting ramping activity across both the Delaware sub-basin and the Denver-Julesberg (DJ) Basin. Forty-six percent of the partnership’s capital budget is to be spent in the Blanco River.

Noble Energy Inc., which reported its quarterly and year-end results also this week, and which is the midstream partnership’s majority owner, capped its exit from the Appalachian Basin last May selling its remainingmidstream interests. As Noble has turned its attention to the DJ Basin, the Delaware sub-basin and the Eagle Ford Shale, its exit from Appalachia began in 2016 when a 50/50 Marcellus Shale joint venture (JV) with Consol Energy Inc. was dissolved.

Houston-based Noble uses the midstream partnership to help expand infrastructure. It now has more than 550,000 dedicated acres across the Delaware and the DJ, and expects its U.S. onshore rig count exposure to grow more than three times this year to 17.

As part of its organic growth plan, Noble Midstream is looking to expand capacity on its Advantage crude oil pipeline as volumes in the fourth quarter reached 60,000 b/d, 67% above third quarter 2017 volumes and up two times since the deal to acquire the pipeline closed in April 2017.

The purchase, split evenly through a 50-50 joint venture (JV) with Plains All American Pipeline LP, includes a 150,000 b/d Texas intrastate pipeline constructed in 2013. The system carries crude oil in West Texas from Reeves County to Crane County and includes 490,000 bbl of combined crude storage at three separate trucking stages in Reeves, Pecos and Crane counties.

“On Advantage, we acquired an operational cash flowing asset at new-build cost and have driven substantial value through strong commercial success in just a little over a year. Additional upside opportunities are currently being negotiated which leverage our asset footprint,” Noble Midstream CFO John Bookout said.

The company plans to spend $10 million in gross capital for three additional pumps on Advantage, thereby expanding pipeline throughput to 200,000 b/d to accommodate future growth.

Nominations on Advantage in January were 90,000 b/d, driven by significant Delaware volume growth as well as volume diversions to Advantage due to pipeline constraints on other systems. While Noble Midstream’s forecast assumes that constraints on other systems mitigate in 2018, the growth in the the company’s Delaware Basin volumes throughout the year support its full-year throughput estimate of more than 90,000 b/d.

Another major focus in 2018 will be the integration of Black Diamond Gathering LLC, a JV that was formed by Noble Midstream and Greenfield Midstream LLC in December in order to pay for the acquisition of Saddle Butte Rockies Midstream LLC and affiliates.

The $625 million deal includes a large-scale integrated crude oil gathering system in the DJ Basin consisting of 160 miles of pipeline in operation, 300,000 b/d of delivery capacity and approximately 210,000 barrels of crude oil storage capacity.

Saddle Butte has 115,000 dedicated acres from six customers under fixed-fee arrangements, including 72,000 dedicated acres from PDC Energy. PDC Energy also expanded its Saddle Butte acreage dedication to 96,000 acres at the Jan. 31 close of the transaction and extended its dedication by five years, bringing the dedication contract duration to about 12 years from close.

“We've been highly selective in evaluating transactions,” Bookout said. “Both Advantage and Saddle Butte fit our acquisition criteria and provide a unique value proposition. I am confident we can do more with these assets than others, leveraging our sponsor relationship.”

Meanwhile, Noble Midstream is expected to bring online the third gathering system in the Mustang area of the DJ Basin by mid-2018. Compared to the CGFs in the Delaware sub-basin, the one being built in the Mustang area requires “smaller capital dollars” with a similar targeted return, Nicholson said.

The freshwater expansion project in that area started operations in December, and deliveries are expected to be begin late in the first quarter. Noble Midstream expects freshwater gross volumes in 2018 to be up approximately 3% for the year, with volumes anticipated to be up approximately 45% in the second half of the year from the first half of the year. This is despite a water per equivalent well assumption below historical results of 200,000 barrels of water, as well as some risk in the customer activity ramp assumptions for the second half of the year, Nicholson said.

Noble Midstream reported net income for the fourth quarter of $46 million (48.8 cents/share), up from $35 million in the fourth quarter 2016. Net income for the year was reported to be $164 million, up 92% from 2016 earnings of $85.5 million.

For 2018, Noble Midstream is guiding $180-195 million in distributable cash flow with distribution coverage of between 1.9 to 2.1 times, keeping in line with the continuation of its 20% annual distribution per unit growth objective.

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