Crestwood Equity Partners LP is taking a three-pronged approach to ensuring its Bakken Shale customers are able to move their crude oil volumes to market in the event that the Dakota Access Pipeline (DAPL) shuts down, either temporarily or permanently.
On the second quarter earnings call held Tuesday, CEO Bob Phillips said the commercial and marketing teams have done a “phenomenal job” of engaging with producer customers on the Arrow gathering system to ensure that their volumes can clear the basin in the event of the DAPL shutdown.
Specifically, the midstream company plans to utilize the Colt Hub terminal, which has 160,000 b/d of rail-loading capacity, 1.2 million bbl of storage capacity and 21 miles of pipeline capacity. It also plans to utilize third-party pipelines and trucking to ensure Bakken volumes are able to move.
With connections to DAPL, Kinder Morgan Inc.’s Hiland system and MPLX LP’s Tesoro High Plains and Bakken Link pipelines, the Arrow system provides “significant downstream delivery capacity,” far more than what is currently being produced, according to Phillips.
“We’re working on additional downstream connections to market from Arrow, and we’ve already started the process of contracting with Arrow producers for priority, firm takeaway service at Colt to diversify their downstream options in the event of a long-term disruption at DAPL,” the CEO said.
Even so, Crestwood management expects a DAPL shutdown to result in a $3-4/bbl negative impact on basin differentials. “But we’re confident in the ability of our Arrow producers to flow volumes through Colt,” Phillips said.
At the current roughly $40 West Texas Intermediate price, “many of our customers are hedged well above that level, and we’re confident that with those netbacks, even with a slight increase in basis differentials, our Bakken producer customers will continue to flow their production in that scenario in the third and fourth quarters of this year.”
More quarterly earnings coverage by NGI may be found here.
Addressing the other “elephant in the room,” Phillips said the bankruptcy proceedings of Chesapeake Energy Corp. are not expected to have a significant negative impact on Crestwood’s ability to meet guidance for this year. Chesapeake is the primary customer in the Powder River Basin, but “it is one of many” customers that Crestwood has on its Stagecoach assets in the northeastern Marcellus Shale.
“At this point in the Chesapeake bankruptcy process, neither of those contracts has been submitted for rejection, and we don’t have any indication that they will,” Phillips said. “We believe both contracts are clearly market-based and are competitive with similar contracts for similar services in the regions we operate.”
Chesapeake remains current on all invoices, according to the chief, and Crestwood has cash flow protections in place with letters of credit, and continues to provide services to Chesapeake in both areas.
“We have a good relationship with the firm and are developing a good relationship through the bankruptcy process with what might be the new owners of the company,” Phillips said.
The expectation heading into the second quarter was that 50% of Crestwood’s oil-weighted assets would be shut-in through the end of July, but the firm “did much better than that,” according to the CEO.
“While the industry experienced extreme commodity price volatility as the market adjusted to lower hydrocarbon demand from the pandemic during the quarter, once the economy started to reopen, we saw increased demand that drove higher commodity prices, and producers very quickly brought shut-in gas production back online much quicker than we expected,” Phillips said.
Results were driven across the Crestwood portfolio, he said, including lower-than-expected shut-ins across the Gathering and Processing (G&P) segment and stronger-than-normal contributions from the Marketing, Supply and Logistics group. The company also benefited from a “timely” contribution from the natural gas liquids (NGL) storage assets that were acquired from Plains All American Pipeline LP in April, “which we quickly integrated into the Crestwood NGL platform. Those assets did quite well for us during the quarter.”
Crestwood also had stable earnings from the Storage and Transportation segment. Phillips said Stagecoach Northeast natural gas volumes have been hitting record highs “as Northeast Pennsylvania dry gas economics have become much more favorable for our producers” and Northeast power demand “is very strong” this summer.
“Overall, the quarterly results highlight the diversity and the balance of our asset portfolio, particularly during these extreme market conditions,” Phillips said.
Looking ahead to the remainder of 2020 and into 2021, the executive said as oil prices have stabilized near $40 and “surprisingly, the fundamentals for natural gas have turned decidedly bullish,” Crestwood’s G&P segment is expected to see “a good second half 2020 with volumes continuing to grow and all shut-in volumes” expected to return by the fourth quarter.
In the Bakken, 20% of the active rigs in the state are running on the Fort Berthold Reservation, according to Phillips, “which is considered to be the best Bakken acreage left to be developed with the lowest break-even cost.”
Management is “encouraged” by the return of completion crews that are taking on drilled but uncompleted wells (DUC) on the Arrow system, and expects volumes to end the year around 20% above second quarter average volumes, which averaged crude gathering volumes of 87,000 b/d, natural gas gathering volumes of 90 MMcf/d, natural gas processing volumes of 86 MMcf/d and water gathering volumes of 73,000 b/d.
“Now in 2021, that’s a different story, and volume growth will clearly be a function of commodity prices and individual producers’ drilling and completion cost versus the netbacks that they can receive and the market access that they’ve contracted for,” Phillips said.
That said, “we really feel pretty confident in the second half of this year and going into next year, depending upon where oil prices shake out.”
Crestwood expects to start generating free cash flow (FCF) in the third quarter, which should continue driving leverage lower. Capital spend through 2021 will be “minimal” at current commodity prices, largely because Crestwood has excess G&P capacity resulting from its 2017 and 2019 expansion program.
“We don’t need to spend a lot of money. We do need to sit back, operate efficiently, cheaply and continue to watch volumes go back to where they were in ’19 and head into higher,” Phillips said.
At the end of June, Crestwood had around $2.6 billion of debt outstanding and more than $400 million of liquidity under its revolving credit facility. Going forward, it expects to use availability under the revolver and FCF to manage future cash needs. In addition, management will continue to evaluate opportunistic noncore asset divestitures as an “incremental alternative” to further accelerate the strategy of preserving balance sheet strength through the downcycle, according to Phillips.
Crestwood reported a 2Q2020 net loss of $24.3 million (minus 68 cents/share), which compares with net income of $225.0 million ($2.76) in 2Q2019. Distributable cash flow was $74.4 million.
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