The Equity Research - North America operation of Deutsche Bank attended the Platts 9th Annual Appalachian Oil & Gas Conference in Pittsburgh earlier this week. This is the writeup/takeaways from the event.
MLPs and Natural
26 October 2016
Takeaways from Platts Appalachian
Oil & Gas Conference
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Marcellus / Utica in Focus
This week we attended the Platts 9th
Annual Appalachian Oil & Gas Conference
in Pittsburgh. As expected, discussion focused on the development of the
Marcellus / Utica and in particular: infrastructure build out, pricing differentials
and timeframe for improved netbacks, and the outlook for NGL resurgence.
Regulatory Environment Increasingly Challenging
If the focus 6-12 months ago was the weak commodity environment, attention
now has completely shifted to the regulatory backdrop and the impact on the
Northeast. The lagged timeline at the FERC (from 12-18 months to 18-24) is
obvious, but the challenges are growing as environmentalists team up with
anti-eminent domain groups – increasing their political power. Though all
court challenges to FERC approvals have lost (emergency stays / rehearings),
opponents are now focusing their efforts on state approvals– particularly water
permits under the Clean Water Act. To this point, the Constitution case (formal
arguments starting next month with a decision coming next year) will be a
useful data point on how much worse the regulatory situation has become.
Takeaway Capacity Build-Out Shifting to the Right
What remains clear is that new takeaway is still crucial in the Northeast.
Current capacity is ~22 bcf/d with Marcellus / Utica vols roughly flat this year
(18 bcf/d and 3.5 bcf/d). Production estimates (WoodMac, others) suggest
another 15-20 bcf/d could come by 2025, and midstream has responded with
~26 bcf/d of potential projects. That said, we think regulatory headwinds/other
delays will lead to => at most 18 bcf/d being actually built: 1.8 in 2H16, 3.5 in
2017, 5.9 in 2018, 7.1 in 2019. There were fewer project specific takeaways
except for Access Northeast – where SEP seems likely to offer a new plan.
Outlook for Narrower Differentials More Challenging Near Term
Beyond simply allowing incremental volumes, new takeaway is also critical to
improving producer netbacks in the region. Despite the rally in Henry Hub
futures recently (spot $2.69), Northeast prices have stayed largely unchanged:
Dom South in the SW Marcellus sits at $1.44, Leidy in NE PA sits at $1.40.
Short distances separate these from higher regional demand hubs: Dawn at
$2.89 / Chicago at $2.77 to the west, NYC at $1.99 / Boston at $3.06 to the
east – and new projects like Rover will be key to getting volumes to these
premium hubs. On a related note, we flag that Union Gas, which controls the
Dawn hub, was positive on both Rover and NEXUS vs. TRP Mainline – the
latter's share going to Union should fall from 53% in 2015 to 19% in 2018.
Resurgence of NGLs Real for the Northeast
Lastly, we continue to think we need more ethane / propane takeaway as
current capacity cannot clear the region. We think the key projects to watch
are: 1) EPD/MPC's Centennial reversal, 2) SXL's ME2, and 3) KMI's Utopia.
That said, while domestic ethane demand growth is expected (+600 mb/d by
2019), export dynamics are weaker as Europe appears saturated – we need
Asia and LatAm in the interim. The situation is worse for propane, as spot
export arbs remain low and a lower domestic demand ramp is expected.
Distributed on: 26/10/2016 22:09:49 GMT