Good News for PDCE and SCRI

[dan_s]

By Greg Avery – Reporter, Denver Business Journal
Aug 13, 2019, 8:02am MDT

Colorado oil companies expect natural gas processing constraints in the Denver-Julesburg Basin to ease with the completion of new infrastructure projects worth hundreds of millions of dollars, allowing production to rise more rapidly in coming months.

Last week, Denver-based DCP Midstream LP (NYSE: DCP), the biggest natural gas processing and pipeline company in the Denver-Julesburg Basin, brought its O’Connor 2 natural gas processing plant into service and it began reaching full capacity processing 200 million cubic feet of gas daily.

The $375 million project, near the town of Kersey in Weld County, is designed to bring DCP Midstream’s total natural gas processing capacity to 1.3 billion cubic feet per day in the Denver-Julesburg Basin.

A newly announced DCP Midstream agreement with Western Midstream will drive further expansion, taking DCP’s processing in the basin to 1.7 billion cubic feet by mid-2020 and allowing DCP Midstream to postpone building the Bighorn processing plant it had planned, the company said.

DCP Midstream’s seven-year offload agreement with Western Midstream, an offshoot of Occidental Petroleum Corp., is to process up to 225 million cubic feet per day more than DCP can now.

“This incremental capacity is the fastest solution to meeting our processing commitment to our customers,” said CEO Wouter Van Kempen.

Oil and gas companies drilling new wells in the area eagerly anticipate DCP Midstream’s new capacity.

Oil companies’ production growth has outstripped the ability of some pipelines in the area to take away natural gas from wells that are primarily drilled for more lucrative crude oil. Companies have had to limit their oil production to match the natural gas takeaway capacity, causing tension over infrastructure investment.

DCP Midstream plans to spend $125 million building connecting infrastructure to Western Midstream’s Latham processing plant, but that will save DCP Midstream about $200 million or $250 million compared to the cost of building its Bighorn plant, he said.

At least for now. The company is in good position to still build Bighorn if production expansion in the basin continues.

“With permits and land already secured, we preserve the optionality to build future capacity via the Bighorn facility if customer demand requires it,” Van Kempen said.

Some companies, like Denver-based SRC Energy, (NYSE: SRCI), set their budget with the expectation of limited natural gas process capacity this summer in the Denver-Julesburg Basin, releasing a well completion crew and a drilling crew. Even so, downtime in the basin’s natural gas systems crimped SRC Energy’s production beyond what was expected, the company said.

The Aug. 7 full operation of DCP Midstream’s O’Connor 2 plant came later in the summer than Denver-based PDC Energy Inc. (Nasdaq: PDCE) had expected.

Without O’Connor 2, pressure in some natural gas takeaway pipelines was so high, it created what Scott Reasoner, COO for PDC Energy, called “one of the most challenging midstream environments I’ve seen a long time.”

The high line pressure in the natural gas systems translated into reduced well performance; PDC Energy essentially shut in its older vertical wells in the Wattenberg Field area due to conditions, Reasoner said.

How well the O’Connor 2 plant and other projects relieve line pressure will be important to how PDC Energy performs, the company said.

“Our Wattenberg story for the second half of the year is largely dependent on the performance of DCP’s plant,” Reasoner said.

Without reliably reduced line pressure, it’s hard for PDC Energy to know what the long-term production of its wells in the area can be, Reasoner said.

DCP Midstream increasing capacity by nearly 50% before next summer is a proactive and encouraging expansion that should help a lot, said Lance Lauck, a PDC Energy senior vice president of corporate development.

Other companies have invested in creating their own midstream solutions.

Denver-based Extraction Oil and Gas (Nasdaq: XOG) launched its a subsidiary, called Elevation Midstream, to handle increased natural gas and liquids its wells produce. That, and a project east of Greeley by Rocky Mountain Midstream, will help Extraction meet a big upswing in production from wells it is drilling and completing this summer and fall, Matt Owens, Extraction Oil and Gas president and co-founder, told investment analysts.

A year ago, Extraction executives expressed frustration to Wall Street about how an earlier DCP Midstream processing expansion arrived slower than expected. This year, though, Extraction found other midstream capacity and timed its new oil and gas wells differently, he said.

“After the learnings from last year, we’ve been a lot more conservative in our assumptions,” Owens said.

Farther to the north, near the Wyoming border with Weld County, HighPoint Resources Corp. (NYSE: HPR) hasn’t had to curtail its production.

The Denver-based oil and gas producer last year diversified the natural gas takeaway and processing companies with which it partners. Summit Midstream added capacity in mid-summer, which has been helping keep HighPoint growing, said Scot Woodall, president and CEO.


The diversification will help the company make use of high-intensity fracking it has been testing and HighPoint forecasts significant production growth will allow it to reach 12.5 million to 13 million barrels of oil and equivalents produced this year, he said.

[mattreue]

These s.o.b. shale companies are drilling and completing like WTI is $80. This is not good news. I actually drove by this very area in Weld county today looking at some places to duck hunt. Newly completed wells as far as the eye could see. And some drilling rigs drilling, with new pads being made.

[mkarpoff]

Maybe they expect oil to be $80. If they wait for 80 without having DUCs they will have missed the boat.

[dan_s]

U.S. active rig count is way down. U.S. oil production growth has stalled (see our Aug 20 Flash Alert).

Weld County just happens to be the core of the core for the DJ Basin, so lots of D&C activity there should continue. Plus, new midstream production facilities are coming online in Weld County (center of the DJ Basin) that should de-bottleneck that area. That is why more wells are being completed this summer in Weld County.

Take a look at the bottom of the PDC Energy forecast/valuation model. The company generated $399.5 million of cash flow from operations during 1H 2019 on realized oil prices of $50.42/bbl in Q1 and $52.97/bbl in Q2.

At $56/bbl for oil, PDC should generate close to $250 million of operating cash flow per quarter. They are generating free cash flow from operations today.