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DJ Play That Song

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It’s no secret that DJ Basin crude takeaway is overbuilt now that the Saddlehorn/Grand Mesa Pipeline came online in Q4 2016. We expect total pipeline throughput to be below capacity by more than 300 Mbpd by YE 2017, even after accounting for a ramp in drilling activity. On the flip side, we want to identify which operators are at risk of holding too much capacity. Surprisingly, some of the small DJ Basin operators have a clear path to meeting their volume commitments. Extraction Oil & Gas (XOG) has commitments on Grand Mesa of 40 Mbpd initially, ramping to 58 Mbpd by Q4 2018. XOG was only producing 25 Mbpd (gross) in September, but next year’s drilling plan will allow the company to meet its 40 Mbpd obligation before it begins to climb. If XOG adds a fourth rig at some point, it will have no problem meeting its longer term obligations. Likewise, Synergy Resources (SYRG) can meet its 11.2 Mbpd commitment by mid-2017 with two rigs, which it’s currently running today. Bonanza Creek (BCEI) will likely be below its total obligation of 27 Mbpd. Their operated crude production (gross) declined from 20 Mbpd in 2015 to only 11.5 Mbpd in September 2016. Outlining the contracts for the smaller operators leads us to believe that larger operators are the ones holding excess crude capacity out of the basin. Knowing this, the counterparty risk on operators below volume commitments seems to be minimal, with the exception of BCEI. We believe larger operators are better able to afford a contract that is above market  rate (especially when operating below a MVC). This is good news for pipeline operators like MMP, PAA, and NGL. (Tickers: XOG, SYRG, BCEI, MMP, NGL, PAA)

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.