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DCP Hiking Capex, Nearing FID on Big Horn

DCP Midstream is increasing its capital expenditures (capex) for the remainder of the year as it works to accelerate projects and infrastructure for its customers, management said Tuesday.

While several growth projects are in the pipeline for the midstream company, a final investment decision (FID) on the proposed Bighorn natural gas processing plant was being delayed pending midterm election results and their impact on Colorado assets. Voters sided with the oil and gas industry and defeated Proposition 112, a ballot measure that would have extended setback requirements for future wells.

“We stand by the integrity and safety of our operations and have been proud to join Colorado's industry and our state's top leaders from every political background in a remarkable effort to defeat this draconian ballot measure,” CEO Wouter van Kempen had said Tuesday during a call to discuss quarterly earnings.

With the initiative’s defeat, DCP maintains a strong outlook in the Denver-Julesburg (DJ) Basin, which is underpinned by “strong customer relationships and a deep bench of tremendous growth projects” like the O'Connor 2 natural gas processing plant and the proposed Bighorn, as well as multiple residue gas and natural gas liquids (NGL) pipeline expansions, van Kempen said.

“I firmly believe that some of the best natural resources in this country are under our feet here in Colorado, and the DJ Basin has an incredibly bright future.” However, he told analysts that the management team wasn’t going to “breathe a sigh of relief and assume business as usual” until Prop 112 had been defeated.

Van Kempen committed to working with policymakers, regulators, communities and its stakeholders to develop a sustainable solution “that allows for responsible energy development while ensuring our neighbors are confident in our safety and environmental processes.”

DCP expected to successfully manage even if Prop 112 had passed, as its strategy to evolve from a company almost exclusively focused on gathering and processing (G&P) to a “well-diversified, full-service midstream provider across a wide geographic footprint has served us well in many ways,” he said. Tuesday’s vote would be “no exception.”

While the DJ Basin is a successful component of DCP’s G&P portfolio, most of its business would not be affected by the potential impacts of Proposition 112, according to van Kempen. Additionally, had the measure passed, DCP still expected its system in the DJ to continue to run at full capacity for several years because of the existing inventory of permitted and drilled but uncompleted wells.

While Bighorn’s future remains in limbo, DCP works to bring online several other projects that should alleviate some of the infrastructure constraints that have developed in key plays across the United States. Among those projects is the 300 MMcf/d O’Connor 2 plant in Colorado, which was originally expected to be in service in the second quarter 2019 but now is on an accelerated timeline for operation.

DCP also is working to move up the start-ups for some of its NGL pipelines, including Sand Hills in the Permian Basin, which expanded to 440,000 b/d at the end of the quarter and is expected to increase to 485,000 b/d by the end of the year. Sand Hills reached record throughput at a 99% utilization rate during the third quarter, management said.

The company is also building a 25-mile connector to the SemGroup Corp.’s White Cliffs Pipeline, which is being converted to a Y-grade line from a crude oil pipeline.

The accelerated timelines for these projects comes as robust unconventional oil and gas production has necessitated increased processing and takeaway capacity. “What you're seeing now is just us moving as fast as we can to help deal with the constrained environment,” CFO Sean O’Brien said.

Still, even with increased NGL and crude takeaway capacity, the fact remains that fractionation capacity is also tremendously tight in the country, van Kempen said. DCP is working to address the issue through its partnership with co-parent Phillips 66 as the midstreamer holds an option to acquire a 30% ownership interest in two 150,000 b/d fractionators to be constructed within Phillips 66's Sweeny Hub on the Texas coast. The option can be taken at the in-service date, expected in late 2020.

“As a midstreamer and as an industry as a whole, we've been trying to keep pace, but all of our timelines are very, very different than a producer timeline,” van Kempen said. “The great thing about the shale revolution is that producers can flex their production capacity very, very quickly, and they can ramp it up very quickly. But building long-haul pipelines, fractionators, gas processing plants takes much, much more time.”

The company chief said while he is very confident that DCP will secure “very nice growth” in 2019, the industry is still working in a constrained environment. “So we'll probably have a little less growth than you would see in a completely fully unconstrained environment, and some of that is probably going to push into 2020.”

That said, DCP continues to see very, very high utilization rates at its various facilities. “I think the most important thing in this environment for us is that we are very confident that we will keep our customers’ product flowing,” van Kempen said.

Meanwhile, the move to bring online its various projects more quickly does not come without cost. DCP updated its 2018 growth capex guidance to $825-900 million from $750 million.

O’Brien noted that costs were higher in the third quarter as the company brought on assets ahead of budgeted schedules, and it continues to advance “DCP 2.0” transformation. In addition, it has stepped up efforts to improve reliability across its footprint. Despite the higher costs, the CFO said a portion of the capex would increase margins and cash flows, a trend expected to continue into 2019.

O’Brien also said he expected distributable cash flow (DCF) to be lower in the fourth quarter compared to 3Q2018 “as we anticipate some timing differences to materialize, be they higher maintenance capital, lower distributions from our joint ventures, as well as increased ethane rejection and continued wide basis differentials for gas and Conway NGL prices.”

Still, the midstream company expects to exceed the high end of its 2018 adjusted earnings and DCF guidance ranges.

DCP reported 3Q2018 net income of $81 million (18 cents/share), compared with a $1 million loss (minus 41 cents) in 3Q2017. DCF for the quarter was $209 million, up from $187 million from a year ago.

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