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Becca Followill Houston February 11, 2009 - PowerPoint PPT Presentation

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Research Update What is Changing in the Midstream Industry? Becca Followill Houston February 11, 2009 *Disclaimers on page 37 of this document. Energy Snapshot Where are we? (February 6, 2009) Current 2008 (% ) YTD ’09 (%) Majors (XOI) 975 - 37% 0%

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Research Update

What is Changing in the Midstream Industry?

Becca Followill


February 11, 2009

*Disclaimers on page 37 of this document.

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Energy Snapshot

  • Where are we?

    • (February 6, 2009)

    • Current2008 (%) YTD ’09 (%)

    • Majors (XOI) 975-37% 0%

    • E&P (S&P 1500 Oil & Gas) 386 -38% +5%

    • Oil Service (OSX) 138 -60% +14%

    • MLPs (AMZ) 202 -41% +15%

    • S&P 500 869 -38% -4%

    • Crude Oil $40/bbl -54% -10%

    • Natural Gas $4.77/mcf -25% -15%

    • Gulf Coast Frac Spreads $1.79/mmbtu-98% 100+%

  • Opinion:

    • Oil price incredibly volatile but ultimately tied to global demand

    • Natural gas: supply problem and demand problem

    • Natural gas catalyst is on the way…rig count falling

  • Risks:

    • Oil – U.S./international demand weaken further

    • Gas – E&P companies don’t drop enough rigs

    • Gas – Demand stays weak (economy risk)

  • 2




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    Onshore Supply Growth

    ~42% (400) rigs activity decline in 2001 impacted supply growth in 2002:

    2000 42.8 bcf/day

    2001 43.9 bcf/day

    2002 43.6 bcf/day

    6% onshore supply growth with ~flat rig count from early 2006 – early 2008.

    Recent decline is due to Gustav/Ike related impacts. Onshore supply growing 10% y/y in 2008.







    Source: Baker Hughes, EIA, TPH Estimates


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    Implications for Rig Count

    Aug ’08

    1,543 rigs


    1,046 rigs




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    Rig Count Changes by Well Path

    Source: RigData, Tudor Pickering Holt




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    Industrial Demand Components

    • Uncertain economic outlook creates uncertainty when forecasting natural gas demand as industrial sector accounts for ~30% of total US gas consumed.

    • Weak automotive, chemical and steel outlook will likely result in lower industrial demand in 2009.

    • US industrial sector accounts for 20% of total electricity output. Weakness in the industrial sector will have spill-over impact into US power sector which will have an even greater natural gas demand impact.


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    Natural Gas – Power Generation

    US GDP and Total Power Generation Load

    US natural gas demand driven by electricity sector expansion and growth







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    Midstream Issues

    • New administration – new rules, new agenda



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    Obama Land

    • Economy and jobs creation center stage

    • It’s a green, green world

    • Tougher labor and environmental regulations

    • Coal/Oil Out, Renewables In, Gas a necessary fossil fuel

    • CO2 legislation – 2nd half of term issue



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    Midstream Issues

    • New administration – new rules, new agenda

    • Heavily constrained capital markets = higher cost of capital



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    Midstream Issues

    • New administration – new rules, new agenda

    • Heavily constrained capital markets = higher cost of capital

    • Working off the excess



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    Gas Processing Capacity

    • We see only modest gas processing capacity additions 2008-2010, increasing L-48 capacity by 7%.

    • However, this is in a market where ethane and other NGL demand is weak, so incremental capacity matters.

    Source: Oil and Gas Journal 2008, Company Press Releases, Tudor, Pickering, Holt

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    Changing Dynamics: Ethylene & Propylene

    • Currently, the U.S. has the most ethylene and propylene processing capacity in the world, at 22% and 27%, respectively. China is second, with 8% of both ethylene and propylene capacity.

    • Prior to the financial meltdown, there was mounting concern that a massive amount of planned new international ethylene and propylene capacity would flood the market, eventually resulting in the U.S. becoming a net importer, thus backing off demand for domestic NGLs.

    • The vast majority of the adds are in the Middle East, where they’ll use cheap gas to make NGLs to feed the new petrochemical plants.

    • Given the economic slowdown, we are now assuming that only the plants currently under construction will be built. In total, these add 15% to existing capacity, or 3.5%/yr growth – not helpful in a weak economy, but not the onerous 39% addition if everything was built.

    Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt

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    10-17-08 Propylene prices hit 3-yr low

    10-18-08 Naphtha prices in Asia drop by 50% since early August

    10-24-08 India’s largest petrochem major to have halved PP run rates

    10-27-08 Weak demand compels Formosa to extend crack shutdown indefinitely

    11-3-08 Equistar Idles Olefin Plant in Texas

    11-11-08 Ineos plans shutdown of 2 polypropylene units in Texas

    11-26-08 UK’s BPI to Close Northeast England Facility

    11-28-08 German Petrochem Sector to Face Difficult times Ahead

    12-6-08 DuPont to Eliminate 2,500 Employees in Western Europe, US

    12-9-08 Dow to Cut 11% of work force, Shutter 20 plants

    12-11-08 Dow Set to Re-evaluate Scope of Proposed Oman Project

    12-12-08 Japanese Ethylene production falls to 12-yr lows

    12-25-08 China's largest ethylene producer expects to suffer major loss in 2008

    12-29-08 Kuwait calls off Dow Chemical’s US $17.4B JV

    12-31-08 Work on Qatar-based multi-billion petrochem complex stalled

    1-5-09 LyondellBasell’s Chocolate Bayou C2-C3 facility shuttered indefinitely

    1-6-09 Ethylene and propylene prices strengthen in Asia

    1-6-09 Taiwan's Formosa puts 700,000 tpa cracker off stream due to demand

    1-8-09 LyondellBasell’s US operations file Chapter 11

    1-14-09 Sunoco to shutter polypropylene plant in Bayport

    1-16-09 Equistar plans to restart La Porte olefin unit

    1-19-09 Asian benzene plants hike run rates on demand recovery

    1-20-09 BASF cautions of potential cuts in production and jobs

    1-20-09 Rohm & Haas to shutter plants and cut 900 jobs

    1-21-09 Sunoco to permanently down the shutters at PP plant in Texas

    1-24-09 Huntsman to lay off 9% of total workforce; shut UK-based TiO2 plant

    1-29-09 LyondellBasell announces €100/ton increase in PE prices in Europe

    1-29-09 Equistar Chemicals plans restart of La Porte olefins unit by end of month

    1-31-09 INEOS NOVA announces up polystyrene prices in Europe

    Midstream – Diary of a Cycle



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    Midstream Issues

    • New administration – new rules, new agenda

    • Heavily constrained capital markets = higher cost of capital

    • Working off the excess

    • Declining cost structure



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    Midstream Issues

    • New administration – new rules, new agenda

    • Heavily constrained capital markets = higher cost of capital

    • Working off the excess

    • Declining cost structure

    • Changing ownership landscape



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    Changing Ownership Landscape

    • MLPs – traditional midstream players

    • But troubled:

      • 13% average MLP yield

      • 18% average Midstream MLP yield

    • 5 MLPs announced distribution cuts this quarter

    • 14 Midstream/Pipeline MLPs’ distributions will be flat



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