The Daley Note: September 13, 2022
Occidental Petroleum (OXY) has 19 active rigs in the Permian according to East Daley’s rig tracking data for the week ended Aug. 28, representing a 14% increase from July levels.
The M-o-M rig adds all came from the Delaware Basin (+2.3 rigs, 15 total), where OXY continues to focus its core drilling operations. Its Midland rig count remains unchanged at 4 rigs since the beginning of 2021.
The latest increase is sure to result in additional cash flow for G&P systems where OXY will process its volumes, but who ultimately wins from this business? We see some nuances that could disproportionately benefit some midstreamers more so than others. Based on East Daley’s Midstream Activity Tracker via Energy Data Studio, we currently track seven unique G&P systems in the Delaware with OXY rigs.
Historically, OXY’s primary Permian processing counterparty has been Enterprise Products Partners (EPD), which has received ~30% of OXY’s total gas production. Western Midstream (WES) is not far behind EPD, attracting ~16% of OXY’s production between its two systems, MiVada/Bone Springs and DBM. However, the EPD and WES systems are full and will not be able to accommodate additional volumes until 4Q23, when both companies add processing at their Mentone complex (EPD +300 MMcf/d and WES +300 MMcf/d).
Given that OXY’s rig adds have primarily been in Eddy and Lea counties, NM, the company has plenty of optionality with ~19 active G&P systems in the area. Based on historical relationships, we see the systems most likely to benefit as Crestwood Equity Partners (CEQP) – Willow Lake and Targa Resources (TRGP) – Delaware, which offer combined excess capacity of ~340 MMcf/d (as of 9/7/2022). Oher candidates include private Permian operator San Mateo Midstream and Energy Transfer (ET), which also have spare capacity and process 3% and 4% of OXY’s production, respectively.
For an updated outlook on EPD, CEQP, ET and TRGP cash flows, be on the lookout for our 3Q22 model updates, released next month. For faster analysis, log into Energy Data Studio, to access our suite of G&P dashboards which track rigs, plant inlets, and pipeline samples across more than 350 public and private G&P systems.
WES Runs Full in the Permian
As midstreamers scramble to build new gas processing capacity, we can confirm that Western Midstream (WES) has hit processing capacity in the Permian based on new Texas plant data.
Data indicates system inlets hit capacity and have remained at that level through June, our latest month of plant data (see Figure 1). East Daley had modeled WES’s system hitting capacity starting in September 2022. The early ramp of supply brings upside to East Daley’s 3Q22 EBITDA forecast for WES, and also provides upside to surrounding systems with available capacity.
WES management has mentioned the company has offload agreements in place until its Mentone III plant commences service.
East Daley believes Occidental Petroleum (OXY) and ConocoPhillips (COP) are backing WES’s Mentone III plant. OXY rigs jumped to 19 last week while Conoco rigs have been at 14 since July. Any new gas sent to WES will likely be offloaded until the new plant comes online.
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