Transcript Slide 1

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%
□
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)
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Energy Snapshot:
The Bad News
3
Crude Oil… Off 70+% from July Highs
Oil Prices (WTI) - January 1997 to Current
$140
$120
$/bbl
$100
$80
$60
$40
$20
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Source: Bloomberg
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U.S. Inventory Levels… Full!!!
Distillate Inventory (000 Bbl)
140,000
120,000
100,000
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80,000
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Distillate Inventories (000 Bbl)
160,000
5-yr avg
10-yr low
10-yr high
2007
2008
2009
Crude Oil Inventory (000 Bbl)
Inventory (000 Bbls)
400,000
350,000
300,000
250,000
200,000
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5-year Average
10-Year High
10-Year Low
2007
2008
2009
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$/MMBtu
Natural Gas… Off 60+% from July Highs
Spot Natural Gas and Futures Prices
$16
$14
$12
$10
$8
$6
$4
$2
$0
Spot
Futures
Source: Bloomberg
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U.S. Gas Production… Still on the Rise
EIA-914 Gross U.S. Natural Gas Production Data
65
20%
18%
Production (Bcf/d)
60
16%
55
14%
12%
50
10%
45
8%
6%
40
4%
2%
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No 5
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Total Production
Source: EIA/DOE
Onshore Production
Change in Gross U.S. Nat Gas Production
YTD Change
Region
Thru Nov
Texas
15.4%
Wyoming
11.0%
New Mexico
-3.0%
Oklahoma
3.3%
Louisiana
1.6%
Other
13.2%
Onshore Total
10.5%
GoM
-14.4%
Total
7.2%
Offshore as % of Total Production
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Gas Storage… Filling!!!
Weekly Natural Gas Storage Inventory (Bcf)
4.0
7-yr High
3.0
2009 Level
2.5
5-yr Avg
2.0
1.5
1.0
7-yr Low
0.5
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Inventory Level (Tcf)
3.5
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Energy Snapshot:
The Good News
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Frac Spreads… Coming off Recent Lows
Gulf Coast Frac Spread (45% Ethane)
$12
$10
7-yr High
$/mmbtu
$8
$6
2009
$4
$2
$0
($2)
* 7-yr avg Gulf Coast Frac Spread ~$2.55mmbtu
($4)
7-yr Low
($6)
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Source: Bloomberg and Tudor Pickering & Holt
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Petrochemical Demand… Rebounding… A Little
AAR Weekly Chemical Car Loadings
38,000
10-Yr High
36,000
34,000
Car Loadings
32,000
30,000
28,000
26,000
10-Yr Average
24,000
22,000
2009
10-Yr Low
20,000
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Source: Association of American Railroads
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Baltic Dry Index… Finding a Bottom
November 1999 - Present (Baltic Dry Index)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
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No Ma No Ma No Ma No Ma No Ma No Ma No Ma No Ma No Ma No
Source: Bloomberg
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Rig Count… Market is Correcting
United States Rig Count - 1991 - Present
1,800
1,600
1,400
1,200
1,000
800
Gas
Oil
600
400
200
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Oil
Gas
Source: Baker Hughes, Inc.
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How Does Supply Correct?
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Onshore Supply Growth
2,000
60
A ~42% (400) rigs activity decline in
Onshore Gas Rig Count
1,600
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B
1,200
50
800
45
400
A
B 6% onshore supply growth with ~flat
rig count from early 2006 – early
2008.
C Recent decline is due to Gustav/Ike
related impacts. Onshore supply
growing 10% y/y in 2008.
Source: Baker Hughes, EIA, TPH Estimates
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
40
1998
0
1997
Rig Count
C
Onshore Gross Gas Production, bcf/day
Onshore Gas Production
2001 impacted supply growth in
2002:
2000 42.8 bcf/day
2001 43.9 bcf/day
2002 43.6 bcf/day
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Shale Plays Improving Mix
Average First Year Production, mcf/day
1,200
1,000
1995
1996
1998
800
1999
1997
2000
2002
2003
600
2004
2007
2001
2005
400
2006
200
5,000
15,000
25,000
35,000
Onshore Gas Wells Drilled, Annually
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Implications for Rig Count
Onshore Supply Growth/(Decline), bcf/day
4
Aug ’08
1,543 rigs
2
0
(2)
Current
1,046 rigs
(4)
(6)
(8)
(10)
(12)
(14)
0
400
800
1,200
1,600
Onshore Gas Directed Rig Count
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Rig Count Cuts on Way in Marginal U.S. Plays
Rig Count Changes by Basin
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(25)
-30%
-34%
-41%
-47%
+36%
Alaska
-41%
-25%
-51%
-38%
NE
-50%
S TX
-55%
E TX / N LA
-43%
N TX
(205)
Mid-Con
(275)
(171)
W TX & NM
(225)
(41)
Western
(179)
(41)
Non-TX Gulf
(175)
(69)
(21)
TX Gulf
(95)
(125)
(80)
(56)
(31)
Arkoma
(75)
Rockies
Number of Rigs Dropped
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Rig Count Changes by Well Path
U.S. Land Rig Count Changes (by Well Path) vs. Fall 2008 Peak
0
Number of Rigs Dropped
(100)
(128)
(200)
(300)
(212)
(400)
(500)
(600)
(645)
(700)
(800)
(900)
-30%
-34%
-50%
Horizontal
Directional
Vertical/Other
Source: RigData, Tudor Pickering Holt
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Demand Issues
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E
E
05
03
01
99
97
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93
91
89
87
85
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81
79
77
75
73
07
20
20
20
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% Change (y/y)
Oil Demand is THE Cycle Killer
9%
7%
5%
3%
1%
-1%
-3%
-5%
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Industrial Demand Components
TOTAL
Chemicals
Petroleum/Coal
Primary Metals
Paper
Food
Nonmetallic Mineral
Others
Electricity
(million kWh/day)
2,280
419
102
396
179
185
113
885
Electricity
% Sector
100%
18%
4%
17%
8%
8%
5%
39%
Natural Gas
bcf/day
17.3
6.2
2.3
1.9
1.3
1.6
1.1
2.9
Natural Gas
Sector %
100%
36%
14%
11%
8%
9%
7%
17%
 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 Generation, Thousand Gigawatthours
4,500
US natural gas demand
driven by electricity sector
expansion and growth
2
R = 0.99
4,000
3,500
3,000
2,500
2,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
US GDP (2000 Dollars), $ Billions
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Weak Electricity Demand
15,000
Weekly Data Regression
R2 = 0.7918
Most Recent Data Points
10,000
Actual Weekly Electricity Change
Best Fit
5,000
0
(15,000)
(10,000)
(5,000)
0
5,000
10,000
15,000
(5,000)
(10,000)
(15,000)
Predicted Weekly Electricity Change
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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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Challenging Capital Markets
Moody's Corporate Bond Yield Spreads vs. 10-Year Treasuries
Spread (Basis Points)
2,000
1,600
1,200
800
400
Aaa vs 10-yr
Baa vs 10-yr
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Junk Bonds vs 10-yr
Source: Bloomberg
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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
Gas Processing Capacity (mmcf/d)
Existing Capacity
Rockies
Ark-La-Tex
Mid-Con
Gulf Coast
Other
Planned/Completed Adds
 We see only modest gas processing
capacity additions 2008-2010,
increasing L-48 capacity by 7%.
% Added
YE'07
2008
2009
2010
('08-'10)
8,059
1,560
780
350
33%
14,396
680
565
0
9%
6,198
610
120
0
12%
23,294
120
0
200
1%
9,342
40
20
0
1%
Alaska
9,525
0
0
0
0%
Total
70,813
3,010
1,485
550
7%
 However, this is in a market where
ethane and other NGL demand is
weak, so incremental capacity
matters.
U.S. Gas Processing Capacity
80,000
70,000
MMcf/d
60,000
50,000
40,000
30,000
20,000
10,000
0
2007
Alaska
Source: Oil and Gas Journal 2008, Company Press Releases, Tudor, Pickering, Holt
2008
Other
Gulf Coast
2009
Ark-La-Tex
2010
Mid-Con
Rockies
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Changing Dynamics: Ethylene & Propylene
Worldwide Planned Ethylene Capacity Adds, by Status
Capacity (tonnes/yr) % of Existing
Construction under way
19,110,000
15%
Engineering under way
4,170,000
3%
Planned
1,160,000
1%
Approved
4,180,000
3%
Study
22,010,000
17%
Potential Added by 2012
50,630,000
39%
Worldwide Planned Propylene Capacity Adds, by Status
Capacity (tonnes/yr) % of Existing
Construction under way
11,365,000
15%
Engineering under way
3,823,000
5%
Planned
1,010,000
1%
Approved
1,250,000
2%
Study
10,195,000
13%
Potential Added by 2012
27,643,000
35%
 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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Midstream – Diary of a Cycle
10-17-08
Propylene prices hit 3-yr low
1-5-09
10-18-08
Naphtha prices in Asia drop by 50% since early
August
LyondellBasell’s Chocolate Bayou C2-C3 facility
shuttered indefinitely
1-6-09
Ethylene and propylene prices strengthen in Asia
10-24-08
India’s largest petrochem major to have halved
PP run rates
1-6-09
Taiwan's Formosa puts 700,000 tpa cracker off
stream due to demand
10-27-08
Weak demand compels Formosa to extend crack
shutdown indefinitely
1-8-09
LyondellBasell’s US operations file Chapter 11
11-3-08
Equistar Idles Olefin Plant in Texas
1-14-09
Sunoco to shutter polypropylene plant in Bayport
11-11-08
Ineos plans shutdown of 2 polypropylene units in
Texas
1-16-09
Equistar plans to restart La Porte olefin unit
1-19-09
11-26-08
UK’s BPI to Close Northeast England Facility
Asian benzene plants hike run rates on demand
recovery
11-28-08
German Petrochem Sector to Face Difficult times
Ahead
1-20-09
BASF cautions of potential cuts in production and
jobs
12-6-08
DuPont to Eliminate 2,500 Employees in Western
Europe, US
1-20-09
Rohm & Haas to shutter plants and cut 900 jobs
1-21-09
12-9-08
Dow to Cut 11% of work force, Shutter 20 plants
Sunoco to permanently down the shutters at PP
plant in Texas
12-11-08
Dow Set to Re-evaluate Scope of Proposed Oman
Project
1-24-09
Huntsman to lay off 9% of total workforce; shut
UK-based TiO2 plant
12-12-08
Japanese Ethylene production falls to 12-yr lows
1-29-09
LyondellBasell announces €100/ton increase in PE
prices in Europe
12-25-08
China's largest ethylene producer expects to
suffer major loss in 2008
1-29-09
Equistar Chemicals plans restart of La Porte
olefins unit by end of month
12-29-08
Kuwait calls off Dow Chemical’s US $17.4B JV
1-31-09
12-31-08
Work on Qatar-based multi-billion petrochem
complex stalled
INEOS NOVA announces up polystyrene prices in
Europe
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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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Declining Cost Structure
Electro-Galvanized Steel Sheet (Midwest Spot Price)
$1,200
US$/ton
$1,000
$800
$600
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8
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$400
Source: Bloomberg
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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
35
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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