The Daley Note: September 8, 2023
ONEOK (OKE) is pursuing an NGL pipeline expansion from the Bakken shale play that isn’t really needed, according to basin analysis in East Daley Analytics’ NGL Network Model. While we have doubts about the market rationale, the project makes sense as a play by OKE for market share.
On its 2Q23 earnings call, OKE said it plans to expand its Elk Creek Pipeline running from Montana in the Williston Basin through the Rocky Mountain region, along with an expansion of the West Texas NGL pipeline in the Permian Basin. The Elk Creek expansion likely involves new pump stations and will be a “very high-return, low-multiple” project, OKE said.
East Daley was baffled by the Elk Creek proposal since, based on supply and pipeline data in the NGL Network Model, shippers already have plenty of takeaway available from the Williston to meet future NGL production. Elk Creek and OKE’s Bakken Pipeline are the main pipeline options out of the basin, and both have available capacity (see figure). However, OKE still stands to benefit if the company can consolidate NGLs onto its own assets.
According to the NGL Network Model, Elk Creek flows average ~230 Mb/d from its Bakken interconnect in Montana. The pipeline fills up the remainder of its 300 Mb/d of capacity with Bakken barrels that travel on the Bakken Pipeline and NGL production from the Powder River Basin.
Bakken Pipeline flows an average of 77 Mb/d out of the Williston and delivers ~43 Mb/d of those volumes to Overland Pass Pipeline. OKE jointly owns 50% of Overland Pass with Williams (WMB) and does not operate the asset. The remaining ~34 Mb/d of Bakken Pipeline volumes flow to Elk Creek’s Wyoming interconnect for delivery to Conway and Bushton, KS (see map).
With an expansion of Elk Creek, barrels moving on Bakken Pipeline could instead shift to OKE’s wholly owned pipeline. The 34 Mb/d of Williston NGLs that move on Bakken Pipeline are delivered into Elk Creek anyway further south. But if Elk Creek can source supply directly from the Montana interconnect, those barrels can move at a higher rate. The joint tariff on Bakken Pipeline and Elk Creek totals $5.77/bbl, while the rate on Elk Creek’s full Bakken-Bushton route costs $6.55/bbl.
Using our company Financial Blueprint, East Daley estimates OKE can add ~$32MM in annual EBITDA (7x cost multiple) if the company can move all the Bakken NGLs it currently handles onto Elk Creek and limit use of the Bakken Pipeline/Overland Pass system. This gain is net of declines to OKE resulting from lower long-haul volumes on Bakken Pipeline and lower overall volumes on Overland Pass.
If Elk Creek is expanded, Bakken Pipeline would still be needed to gather NGLs from the Williston and Powder River basins and deliver into Elk Creek, but its long-haul flows (from North Dakota/Montana to Wyoming or Colorado) would effectively be zero unless Bakken production grows significantly. Overland Pass would still be used to transport NGLs from the Green River and Piceance basins, but the pipeline would no longer be critical to move Williston NGL barrels via Bakken Pipeline.
Post-expansion, the Williston Basin would have ~70 Mb/d of spare takeaway capacity on Elk Creek and another 140 Mb/d free on the Bakken Pipeline/Overland Pass systems, leaving significant room for upside if NGL production growth from the Williston or Powder River is stronger than we expect. These estimates exclude any potential uplift OKE may receive at its Kansas fractionators, since the company no longer has to share those barrels with WMB.
Williams, the operator and co-owner of Overland Pass, would take the biggest hit since it will not be able to offset the volume decline on the pipeline. East Daley estimates a ~$19MM impact to WMB. The company also may see reduced fractionation volumes at its Conway fractionator that it co-owns with Phillips 66 (PSX) and OKE.
When OKE initially announced Elk Creek (which directly impacts Overland Pass volumes and earnings), WMB hit back with the Bluestem pipeline. That project connected Overland Pass and WMB’s Conway fractionator to Targa Resource’s (TRGP) Grand Prix pipeline, sidestepping OKE’s Arbuckle and Sterling NGL pipelines. Williams may not have many options though after the latest announcement, as ONEOK continues to dominate NGLs outside of the Permian. – Ajay Bakshani, CFA Tickers: OKE, PSX, TRGP, WMB.
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