Permian Basin Takeaway Capacity Issue

[dan_s]

Notes below are from Morgan Stanley, June 15, 2018

We update our Permian takeaway model to reflect project updates and our commodity
team's most recent Permian production forecast. We now see much tighter constraints
thru 2019 vs. our last update. On our estimates, production rises from 96% of capacity in
2Q18 to 101% of capacity in 4Q18, and then 95%/97%/101% in 1Q/2Q/3Q19. We begin to
see relief in 4Q19 with production at 80% of capacity, though could see that pushed into
2020 depending on pipeline construction progress.

New capacity scarce in near-term. On our revised estimates, we see significant risk for
widening of basis differentials until new pipeline capacity comes online in late 2019 or
early 2020. We see only 50 Kbpd of incremental capacity in 2018 via an expansion of
Permian Express III. We see another 260 Kbpd in 1Q19 through the expansion of
Bridgetex and Sunrise I and II. As expansions, we see little risk to these project timelines.

Followed by a wave of potential capacity, though timing uncertain. In 4Q19, we project
700 kbpd from Gray Oak, 200 kbpd from Cactus II (partial in-service), 220 kbpd from
EPIC (partial in-service). This incremental capacity relieves takeaway constraints and
reduces estimated pipeline utilization to 80%. However, we see substantial risk to the
project timelines. Without these projects, we estimate production would be 104% of
takeaway. (My take is that trucks can easily handle that extra 4%.)

Outlook improves in 2020. Risk shifts to overbuild in 2020+ given a handful of large,
expandable projects. Just this past week, Exxon and Plains signed an MOU for a
potential 1 Mbpd pipeline, which we would expect in the late 2020 time frame. Other
examples include ETP's proposed pipeline to Nederland (we estimate 600 Kbpd) and
Jupiter (500 Kbpd). This overcapacity could be a headwind to recontracting efforts for
existing pipelines so is something to watch. In addition, it seems possible that some of
the proposed 2020+ projects will combine into joint ventures where only one of the
proposed is built.

Morgan Stanley has raised their price target for PAA to $28/unit.