ADoseOfData

New Year’s Resolution # 1: Be Myself

ny-1

The DCP combination announced on Wednesday will bring elusive LLC assets to the public light and eliminate what was an often confusing conversation of who owned what. The timing of the deal is perfect, as overall volumes are expected to increase in 2018/19 from favorable footprints in the DJ and Permian. The largest G&P assets in the deal are the Anadarko and Permian systems, which had average 2016 throughput of 1.44 and 1.30 Bcf/d, respectively. The Anadarko system is expected to continue to decline (down 2% by 2019) despite 22 rigs in operation. There is some upside from drilling activity in Central Oklahoma, but it faces stiff competition from other midstream players. A surge in Permian drilling activity is expected to boost processing volumes there by 146 MMcf/d (11%) by 2019. The outlook for the DJ is also bright following a drilling ramp up in late- 2016 after a Colorado ballot measure to restrict drilling never made it to the election. DJ volumes are expected to increase 113 MMcf/d by 2019, requiring 200 MMcf/d of new processing capacity to come online in 2018. The company also has plans to add another 200-MMcf/d plant in 2019 that will provide long-term growth potential. Despite the positive outlook for volumes in 2018-2020, there is some skepticism whether or not earnings from these assets live up to the 8x multiple reported by management. The implied 8x multiple indicates that these assets should earn about $480mm in 2017 EBITDA. Backing this out of management’s guidance midpoint of $950mm for 2017 suggests that DPM (LP) assets will earn 2017 EBITDA of $468mm – more than $100mm below our estimate and the Street’s estimates. Two possibilities here: 1) our model is overestimating earnings for DPM in 2017 or 2) management overstated the earnings multiple for LLC assets. A major risk to DPM’s asset base is the Eagle Ford system, which has the potential to decline, but has seen more rigs in the last few weeks. (Ticker: DPM)

About The Author Justin Carlson

I have over 10 years of experience in data analysis, research, and consulting across the energy sector. I currently serve as Vice President of Research and Managing Director at East Daley Capital, an energy assets research firm that is changing how investors look at midstream energy risk with an asset-driven information service that combines proprietary research with a trusted team of unbiased, experienced energy analysts. My insights and analysis bring greater transparency to the energy financial market by quantifying potential risks by asset and enabling investors to make more informed and accurate projections and investments. Prior to joining East Daley Capital, I was a senior manager at Platts, a division of McGraw Hill Financial, which acquired Bentek Energy, where I was a senior member of the leadership team.