After setting fresh highs in gathering volumes on its Jackalope natural gas gathering and processing (G&P) system in Wyoming earlier in October, Crestwood Equity Partners LP is looking to add incremental dedications to the system.
The master limited partnership (MLP), which took over full ownership of the Jackalope system in April from Williams, is in “late-stage discussions” with offset third-party producers for the G&P dedications in the Powder River Basin (PRB), where the company aims to enhance producer diversity within the play, according to CEO Robert Phillips.
The company has three compressor station projects already underway that are expected to be completed throughout 2020.
Speaking on a call Tuesday to discuss third quarter earnings, the company chief touted the PRB operations team for its work in transitioning operations away from Williams.
“The last six months, by our calculation, operating costs/unit, are down about 27% compared to a similar six-month period last year under the previous operator,” Phillips said.
Jackalope set a daily gathering record of about 173 MMcf/d in October and averaged gathering volumes of 150 MMcf/d for the full quarter, which was an increase of 27%, compared with 118 MMcf/d in the third quarter 2018. Chesapeake Energy Corp., the primary shipper on the system, connected 25 wells during the quarter, bringing the year-to-date total to 52 wells.
Crestwood also achieved full operations of its Bear Den II gas processing plant in the Bakken Shale, with volumes steadily increasing after running around 65 MMcf/d through start-up and commissioning.
The company invested $65.7 million of growth capital during the quarter, some of which targeted the 120 MMcf/d plant, which has downstream connections to Northern Border Pipeline Co. for residue gas and will connect to Oneok Inc.’s Elk Creek pipeline for natural gas liquids (NGL) takeaway upon completion of the northern section of the line.
The Bear Den II plant is fed by the Station 8 compressor facility, a 27,500 hp electric-driven trunkline compression station, which also received a portion of the growth capital spending.
With the completion of the debottlenecking projects and the in-service of Bear Den II, Crestwood’s Arrow system achieved record daily gathering rates of 133,000* b/d of crude oil, 114 MMcf/d of natural gas and 85,000 barrels a day of produced water.
For the full quarter, the Arrow system averaged crude oil volumes of 109,000 b/d, 47% above 3Q2018; natural gas volumes of 95 MMcf/d, up 44%, and produced water volumes of 74,000 barrels a day, up 52%.
Forty-two wells were connected to the Arrow system in 3Q2019, bringing the year-to-date total to 83. Based on producer forecasts for the remainder of the year, Crestwood estimated well connects on the Arrow system would increase to about 120 for full-year 2019.
The Arrow debottlenecking project is nearly complete and expected to be in service “within the next couple of weeks.” The project is expected to add 25,000-30,000 barrels a day of additional water gathering and disposal capacity and would drive much of the produced water system capital expansion in 2020.
“There is still a significant amount of water on the reservation, and we need to get those trucks off the road. So we're going to be emphasizing Arrow produced water expansion in 2020,” Phillips said.
Meanwhile, Crestwood’s Bucking Horse I gas processing plant is at full capacity and sending NGLs into Oneok’s Elk Creek pipeline. During the quarter, Crestwood invested $60.7 million on the Bucking Horse II expansion project, Jackalope system expansions and well connects. The expansions are expected to be complete early next year and once fully operational, would increase the Jackalope system’s processing capacity to 345 MMcf/d.
“We are a large gathering company in every sense of the word,” Phillips said. “This is a monumental expansion program by any measure. And it positions Crestwood and our partners and our customers with ample capacity for years of growth, with only modest maintenance and well connect capital required to handle the expected increase in volumes.”
Third quarter gathering volumes were driven by a 47% increase in Bakken crude oil volumes, a 44% increase in Bakken natural gas volumes, a 52% increase in Bakken produced water volumes, a 27% increase in PRB natural gas volumes and a 12% increase in Permian Basin Delaware sub-basin natural gas volumes, but were offset by natural field declines in legacy gas basins.
Gathering volume increases were driven primarily by accelerated producer well connects in June and July, which synced with the completion of the debottlenecking projects, the produced water system expansion and the in-service of Bear Den II, according to management.
Third-quarter natural gas storage and transportation volumes averaged 2.2 Bcf/d, compared with 2.4 Bcf/d in 3Q2018. At the COLT Hub, daily rail crude oil loading volumes averaged 46,800 b/d for the third quarter, driven by continued demand for Bakken crude barrels in the East and West Coast markets. NGL loading and storage utilization at the facility also increased once Bear Den II went into service.
Looking into 2020, Crestwood expects to invest $100-150 million on “low-risk, accretive growth projects” with roughly 40% targeting the Bakken, 40% for the PRB and 20% for the Permian Delaware, areas it sees as being “the most economic and productive shale plays in the industry.”
“We're building assets that are going to be there for 50 years, gathering production that's going to be there for longer than 50 years,” Phillips said.
Meanwhile, a quick return to negative gas pricing in the Permian following the rapid fill of the Gulf Coast Express pipeline doesn’t appear to have major implications for Crestwood. Despite the low commodity prices, NGLs have remained reasonably stable throughout the year, according to Phillips.
Furthermore, its long-term contract with Chevron Phillips Chemical to sell Y-grade liquids from the Orla plant in West Texas via the Orla-to-Bendedum segment provides the company with “better than market” transportation and fractionation, which should enable it to be “more competitive as a gathering processor to attract volumes into our plant and pass that strong NGL netback price on to our producers” starting in January.
“While there may be some softness at the beginning of the year, I think throughout the entire 2020 year, we're going to have equal to or greater supply development activity in the areas that we operate,” Phillips said. “We've got excess capacity at Orla, and we're going to be aggressively competing for volumes from the major interconnects that we've completed in the second half of the year with a fairly optimistic view that our producers are going to drill throughout the year on a balanced basis.”
Nevertheless, management plans to maintain a close working dialogue with its producer customers as they finalize 2020 plans and remains focused on optimizing capital spending should any producers adjust ongoing development plans.
Crestwood invested $138.7 million in consolidated growth capital projects and joint venture contributions during the third quarter. For the year, Crestwood expects to invest $425-475 million in growth capital to execute expansion projects primarily in the Bakken and PRB. It also raised adjusted earnings guidance for 2019 to $535 million from $520 million.
The company’s primary financial objective in 2020 is to become free cash flow positive in the first half of the year, according to management. It also aims to position the company to begin executing its strategy to optimize returning capital to unit holders.
“We are still an MLP, and we're proud of it,” Phillips said. “We don't mind being small, but we want to be the best small MLP out there, and I think 2019 is setting a great platform as we roll into 2020.”
Crestwood reported third quarter net income of $33.6 million, up from a net loss of $5.2 million in 3Q2018. Distributable cash flow was $82.5 million, a gain of $30.8 million from the year-ago period.
*Correction: In the original article, volumes associated with Crestwood’s crude oil and produced water segments were incorrectedly reported to be in the millions. Instead, the reported volumes for those segments are in the thousands. NGI regrets the error.