Crestwood Equity Partners LP expects to finish out 2020 on record footing as a resumption of normal operations in core areas of the Bakken Shale and Permian Basin drive higher volumes of natural gas, oil and water.
The Northeast also has “good potential for growth” as business in the challenging environment has stabilized, and prospects for development have materialized given the tighter gas market for the upcoming winter and in 2021, according to CEO Bob Phillips.
“I think the portfolio performed very well during the quarter, exactly as it should,” Phillips said Tuesday during the quarterly earnings call. “We built this portfolio to be diversified and to not only mitigate against the risk of commodity volatility, which we can’t control, but also in many cases to take advantage of the opportunities that commodity volatility creates in our market.”
Volumes are continuing to hit records so far during the fourth quarter across gas, crude and water, which the company chief expects to continue heading into 2021.
Arrow, on North Dakota’s Fort Berthold Indian Reservation in McKenzie and Dunn counties, posted multiple records in 3Q2020. The system averaged record gas gathering volumes of 119,000 Mcf/d, gas processing volumes of 115,000 Mcf/d and water gathering volumes of 97,000 barrels/day. Crude gathering volumes averaged 107,000 b/d.
Only one rig and one completion crew operated on the Arrow footprint throughout the quarter, but with that level of activity, 15 new wells were connected. There are currently eight drilling rigs in the area of dedication with additional rig activity in adjacent areas to the system. Twenty wells are expected to be completed by the end of the year.
The Permian’s Delaware sub-basin also has seen increased activity, with five rigs now running. These include two on the Willow Lake system by Concho Resources Inc. and three on the Nautilus Pipeline by Royal Dutch Shell plc. These should result in 15-20 wells being connected to Crestwood’s system in the final three months of the year and higher volumes in early 2021, according to management. There also is a large inventory of “cheap” drilled but uncompleted wells in the Permian projected to come online in the coming year.
Citing the recent rise of New York Mercantile Exchange strip pricing to $3.00/MMBtu and above, Phillips said management is beginning to see “active drilling” in the Barnett Shale of North Texas. It also has a “very positive outlook” for the Powder River Basin (PRB) as Chesapeake Energy Corp. starts to bring back oil production.
The Stagecoach pipeline in the Marcellus Shale reported record transportation volumes during the third quarter, with the bulk of capacity under firm contracts and generating “very stable revenue streams,” according to Phillips.
Meanwhile, the tightness developing in the U.S. market creates “incremental opportunity for us to continue servicing our customers on the storage and transportation side” and highlights the need for incremental outlet points in Appalachia going forward. “I think that all of that bodes well for the value of pipeline in the ground today, and we will continue to position our Stagecoach assets as irreplaceable premier infrastructure assets up there servicing that growing production.”
CFO Robert Halpin said storage is becoming increasingly important given tighter balances, which may result in slightly higher margins going forward. Crestwood operates the Tres Palacios storage facility on the Gulf Coast, which is “an absolutely critical storage facility” for the liquefied natural gas (LNG) business. With export demand becoming a larger part of the equation for demand, the massive cargo cancellations that occurred this summer and the record hurricane season, the facility is approaching full utilization, he said.
The Colt Hub terminal, which includes 160,000 b/d of rail-loading capacity, 1.2 million bbl of storage capacity and 21 miles of pipeline capacity, experienced an increase in sequential volumes as producers returned previously shut-in production. The resumption of completion activity, in combination with producers increasing their utilization of crude-by-rail assets amid the regulatory uncertainty around the Dakota Access Pipeline (DAPL), also boosted volumes.
“As we monitor the DAPL legal process, the Colt Hub is a natural hedge and offers our Arrow customers flow assurance, and our commercial team continues to identify new pipeline connections for alternative takeaway capacity,” Halpin said.
Crestwood is “very lucky” the acreage dedicated to its core assets in the Bakken, PRB and Permian are “el primo” acreage that work at low break-even points.
Senior Vice President Diaco Avika, who oversees Gathering and Processing (G&P), said Crestwood is working “hand-in-hand” with producer customers to ensure that it captures as much of the product as it can into the pipeline. Cluster spacing is “right on the money,” enhancing productivity with electrical submersible pump utilization and keeping an “amazing amount of production coming out of these wells.”
Producer customers are also getting costs down. From a fracture stage perspective, operators are “doing five more stages than what they did prior to Covid,” and that’s incremental improvement from a learning curve perspective, according to Avika.
“We’re seeing that in the Bakken. We’re seeing that become a standard in the Permian. Again, that drives our costs down even further, increasing the productivity of their wells.”
Despite the lower costs, Phillips said Crestwood is not relying on producer plans for G&P services to drive its cash flow. The midstreamer spent billions in expansion capital from 2017-2019 to build out excess capacity for G&P assets “to ensure that we could handle full inventory developed by our main producers at the price levels” seen in 2017 to 2019.
Positive 2021 Outlook
“Obviously, the market has changed a little bit,” Phillips said. Nevertheless, the CEO said Crestwood is “very comfortable” with its current volume profile at a $40/bbl oil price and above, which would continue to support free cash flow (FCF), strong distribution coverage and continued debt reduction.
“And at $50/bbl, it’s just math really. We can accelerate debt paid down, strengthen our balance sheet further” and “create more financial flexibility” that could be used to take advantage of opportunities in the market.
Crestwood invested about $11 million in growth capital during the quarter and generated around $30 million in FCF after distributions. It also reduced total debt through a combination of paying down debt and “opportunistically” repurchasing senior notes at a discount to par.
Full-year 2020 results are expected to exceed the midpoint of the revised guidance. Based on conversations with customers, the 2021 guidance range is estimated to be similar to 2020, with growth capital less than $40 million and maintenance capital $20 million or less.
On the topic of mergers and acquisitions (M&A), Phillips said the consolidation in the upstream sector should inevitably trickle down to the midstream space. “The industry gets healthier through consolidation,” and Crestwood’s focus on a strong balance sheet and financial flexibility “plays well into a consolidating market, really on both sides of the trade.”
As the industry transitions to cleaner energy and a lower growth model for fossil fuels, Crestwood management believes “natural gas will play a prominent role in the midstream sector, will continue to improve our sustainability initiatives and be an important part of the energy supply chain.”
Phillips touted Crestwood for its sustainability report in 2018, which nearly every energy company now publishes each year to report environmental, social and governance (ESG) initiatives.
“We’re not following ESG trends. We are actually setting them,” he said. “Crestwood is right at the forefront of that move.”
Crestwood reported third quarter net income of $4.6 million (minus 28 cents/share), down from net income of $33.6 million (12 cents) in the year-ago period. Distributable cash flow was $86.5 million, up 5% from a year ago.
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