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Crestwood Raising Capex on Growing Permian, PRB Footprint

Crestwood Equity Partners LP is increasing its capital spending to reflect its growing interests in the hot spot Delaware sub-basin of the Permian Basin and in the Powder River Basin (PRB) of Wyoming, the company said Tuesday.

Crestwood increased its full-year 2018 growth capital expenditure (capex) to $300-350 million, from $250-300, to reflect its 50% interest in recently announced projects in the two basins. The company invested about $47 million in consolidated growth capital projects during the second quarter 2018 and about $105 million in the first half of 2018.

The long-term plan is built around its three core growth positions in the Bakken Shale, Delaware and PRB “as fundamentals drive continued producer development activity and the need for midstream infrastructure in the areas that we operate,” Crestwood CEO Robert Phillips said Tuesday on a call to discuss second quarter earnings.

In the PRB, Crestwood last week announced plans to expand its jointly owned Jackalope Gas Gathering System and associated Bucking Horse gas processing facility in Wyoming. The Jackalope system is a 50/50 joint venture (JV) with Williams Partners LP.

Management also has begun processing volumes at its Orla facility, through its Crestwood Permian Basin Holdings LLC (CPJV), a 50-50 joint venture with First Reserve. The 33-mile, 200 MMcf/d cryogenic gas processing plant in Reeves County, TX, serves Delaware sub-basin operators and connects the existing Willow Lake system with the Orla plant, which ramped up in conjunction with the Orla plant.

The expansions in the PRB come as the Jackalope system during the second quarter 2018 averaged gathering volumes of 94 MMcf/d, an increase of 55% over the second quarter 2017. Recent daily gathering volumes have exceeded 125 MMcf/d as Chesapeake Energy Corp. continues to aggressively develop the Turner formation. Chesapeake had four rigs operating on the Jackalope system during the quarter and recently added a fifth, Crestwood COO Heath Deneke said.

Chesapeake last week announced the pending sale of its Utica Shale assets for about $2 billion in a bid to strengthen its balance sheet by shifting to an oilier portfolio. The Oklahoma City-based explorer indicated that its net production from the PRB is expected to reach close to 38,000 boe/d by the end of this year and then more than double year/year in 2019.

“Gathering system capacity will be added as needed to support Chesapeake’s development plans,” Deneke said, noting the “resurgence of producer activity” in the basin.

There are 19 rigs currently operating in the PRB targeting primarily the Turner, Frontier, Mowry, Sussex and Niobrara formations, he said. Based on the increasing productivity of recently completed Turner and Niobrara wells, and the current level of rig activity within and around the JV’s dedicated acreage, “volumes are expected to approach the full capacity of the expanded Jackalope system by 2021,” he said.

In the Permian, Crestwood’s Delaware gathering assets averaged natural gas volumes of 157 MMcf/d, a 184% increase over the second quarter 2017. The sharp increase was due to the in-service of the Nautilus gathering system in June 2017 and volume growth in the second quarter 2018.

Currently, there are nine active rigs operating on Crestwood’s Delaware sub-basin gathering systems that will result in continued volume growth through the remainder of 2018, the company said.

Meanwhile, CPJV recently announced it is taking an undivided joint ownership in Epic Y-Grade Pipeline LP’s Orla-to-Benedum segment in Texas, a 16-inch diameter natural gas liquids pipeline, which began service in June. It also has contracted with Chevron Phillips Chemical Co. LP to sell Y-grade liquids from the Orla plant via the Orla-to-Benedum segment to provide feedstock for the Chevron Phillips Complex near Sweeney.

In the Bakken, Crestwood’s Arrow system averaged crude oil volumes of 76.2 million bbl/d, or 7% below the second quarter 2017, while natural gas volumes of 67.8 MMcf/d and produced water volumes of 43.6 million bbl/d, increased 37% and 21%, respectively, over the second quarter 2017.

The increased gas and produced water volumes were the result of completed debottlenecking projects enabling the system to capture previously flared, curtailed or trucked volumes, Deneke said. He said the company is on track to complete most of its remaining debottlenecking projects in the third quarter, which should put Crestwood on a path toward “continued acceleration in producer completions and corresponding volume growth throughout the second half of 2018 and into 2019.”

Crestwood’s expansion plan for the Arrow system would increase the crude gathering capacity to 120 million b/d, natural gas gathering capacity to 150 MMcf/d and produced water gathering capacity to 75 million barrels a day.

During the quarter, Crestwood started construction of the Bear Den Phase-2 processing plant to boost combined processing capacity of Arrow gas to 150 MMcf/d. The Bear Den Phase-2 plant expansion, expected to go in service in the third quarter of 2019, would allow Crestwood to discontinue using third-party processing and begin processing 100% of the gas volumes on the Arrow system, significantly reducing flaring on the Fort Berthold Indian Reservation and providing greater flow assurance to customers, management said.

“Overall, Crestwood’s visible backlog of growth projects in all three basins will provide the partnership a multi-year path to accretive cash flow growth that is fully financed internally through excess cash flow and our revolving credit facility,” Phillips said.

Crestwood reported an operating loss of $9.1 million in 2Q2018, down from a year-ago loss of $15.1 million. Revenue fell to $840.5 million from $850.3 million in 2Q2017.

Net losses in 2Q2018 totaled $21.5 million, versus year-ago net income of $300,000. Net losses attributed to the partners were $40.6 million (minus 57 cents/unit) in 2Q2018, compared with a year-ago loss of $19.6 million (minus 28 cents).

The 2Q2018 net loss included a $24 million impairment related to the sale of the company’s West Coast NGL assets, which included a small gas gathering and processing system, fractionator, butamer and various rail and truck terminal and storage facilities.

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