Brent - WTI Spread - Triple Double Advisors

Energy Macro
Review
July 2013
Oil Fundamentals
2
Current Worldwide Oil
Supply1 and Demand
Europe
FSU
35
30
25
20
15
10
5
0
North America
35
30
25
20
15
10
5
0
35
30
25
20
15
10
5
0
Middle East & OPEC
Africa
Latin
America
35
30
25
20
15
10
5
0
35
30
25
20
15
10
5
0
35
30
25
20
15
10
5
0
Asia Pacific
35
30
25
20
15
10
5
0
Current Production (Mil. Bbl/Day)
Current Demand (Mil. Bbl/Day)
1
Supply does not include OPEC NGLs, Biofuels and Processing Gains. These collectively add 10.2 Mil. Bbl/Day to global oil supply.
Source: IEA, Bloomberg
3
1Q13 YoY Changes in Non-OPEC
Supply and Worldwide Demand
Current IEA Supply & Demand
The IEA forecasts 2013 non-OPEC supply of 54.5
MM Bbl/Day. The IEA expects U.S. production to
rise by 700,000 Bbl/Day in 2013.
Current
Supply
Non-OPEC
53.9
The IEA estimates that the call on OPEC will be
29.7 MM Bbl/Day in 2013 due to rising production
offsetting the growth in worldwide demand.
OPEC NGLs
6.5
Current
Demand
Call on OPEC
29.4
89.8
35
40
45
50
55
60
65
Oversupply
1.1
The IEA currently forecasts 2013 demand of
90.6 MM Bbl/Day. This is an increase of
+795,000 Bbl/Day or 0.9% over 2012 figures.
70
75
80
85
90
95
Mil. Bbl/Day

The IEA estimates that world markets are currently slightly over supplied by approximately 1.1 MM Bbl/Day as
OPEC is currently estimated to be producing 30.5 MM Bbl/Day.
Source: IEA, Bloomberg
4
Year Over Year Changes in
Worldwide Oil Supply1 and Demand
Europe
1.50
1.50
1.00
1.00
0.50
0.50
0.00
North America
1.50
-0.50
1.00
-1.00
0.50
FSU
0.00
-0.50
-1.00
Middle East & OPEC
1.50
0.00
-0.50
-1.00
Africa
1.50
1.00
1.00
0.50
1.00
0.00
0.50
-0.50
0.00
-1.00
-0.50
0.50
Latin
America
1.50
Asia Pacific
1.50
-1.00
0.00
-0.50
-1.00
1.00
0.50
0.00
-0.50
-1.00
YoY Change in Production (Mil. Bbl/Day)
YoY Change in Demand (Mil. Bbl/Day)
1
Supply does not include OPEC NGLs, Biofuels and Processing Gains. These collectively add 0.3 Mil. Bbl/Day to global oil supply.
Source: IEA, Bloomberg
5
U.S. Oil Supply
Growth Scenarios
EIA U.S. Crude Oil Production
7,500
30%
Thousand Bbl/d
10%
Currently, U.S. oil production is up 1.1
Mil. Bbl/Day (+18.4%) over 2012 levels.
6,500
0%
6,000
-10%
5,500
-20%
5,000
-30%
J
F
M
A
% Change from 2012

M
J
J
2012
A
S
2013
O
N
D
5 Year Average
U.S. crude production has exceeded original expectations. SCI estimates that the U.S. will exit 2013 with
production of 7.7 MM Bbl/Day. Current production is 7.4 MM Bbl/Day and increasing by 300,000 Bbl/Day by the
end of the year appears reasonable.
Source: EIA, Simmons & Co.
6
% Change from 2012
20%
7,000
Chinese Oil Imports Steady,
but Light on Growth
China Crude Oil Imports
6.5
15%
China is averaging imports of 5.6 MM
Bbl/D compared to 5.7 MM Bbl/D in the
same period of 2012.
10%
% Change from 2012
Mil. Bbl/Day
6.0
5%
5.5
0%
5.0
-5%
4.5
-10%
4.0
-15%
J
F
M
A
M
% Change from 2012

J
J
2012
A
2013
S
O
N
D
5-Year Avg
In the first five months of 2013, China is averaging imports of 5.6 MM Bbl/D compared to 5.7 MM Bbl/D in the same period of
2012. However, the IEA estimates that total Chinese demand is up +500 kb/d YoY. Thus, there is a divergence of Chinese
imports being down by -100 kd/d for Jan – June '13 and the IEA's estimate of Chinese demand growth at +500 kb/d for
1Q13. Nevertheless, the IEA once again emphasized the potential for slower, less energy intensive GDP growth in China.
Source: Bloomberg
7
Steepening Backwardation
in the WTI Curve
NYMEX WTI Crude Forward Curves
$110 Prompt month prices rise despite
rising U.S. inventory levels…
$105
$/bbl
$100
$95
…while long-term prices
show a slight weakness.
$90
$85
$80
Current Curve
12/31/2012
6/30/2012
 Note the recent increase in the WTI price curve. Likely causes: U.S. pipeline de-bottlenecking becoming
more visible plus increasing political risk premium in oil prices as a result of a multitude of growing Middle
East tensions (Syria, Egypt, Iran, Turkey).
Source: EIA, Bloomberg
8
Crude Bottlenecks
Migrating South
 The start-up of the Longhorn pipeline reversal (initially 75 kb/d) and the West Texas Gulf expansion (70 kb/d so
far) during 2Q are contributing to increased flow of Permian barrels to the USGC and reduced flow of barrels to
Cushing. 3Q Permian pipeline capacity additions including Permian Express (additional 90 kb/d), Longhorn
Pipeline (additional 150 kb/d) and West Texas Gulf (WTG, additional 40 kb/d) will increase the barrels moving to
the USGC while reducing the flow of Permian barrels currently moving to the lower priced Cushing market.
Source: Goldman Sachs, Simmons & Co.
9
Expecting Drawdowns in
Cushing Inventory
EIA Cushing Inventory
55,000
90%
80%
50,000
45,000
60%
50%
40,000
40%
35,000
30%
20%
% Change from 2012
Thousand Bbls
70%
30,000
10%
25,000
0%
J
F
M
A
% Change from 2012

M
J
J
2012
A
S
2013
O
N
D
3 Year Avg
Cushing inventories are currently sitting at about 46.9 MMBbl near their record high of 51.9 MMBbl in January. Permian
pipeline additions could reduce the flow of Permian barrels into Cushing by 250,000 Bbl/Day by 4Q. Assuming everything
else is unchanged, this could represent rapid 1.8 MMBbl per week draws in Cushing storage (8 MMBbl over 30 days, 15
MMBbl over 60 days & 22 MMBbl over 90 days). Meaningful Cushing storage draws are a reasonable expectation for
4Q’13, with the potential for Cushing storage levels to approach minimum operating levels by late 4Q’13/early 1Q’14.
Source: EIA, Bloomberg, Simmons & Co.
10
Anticipated De-bottlenecking at
Cushing Narrows Brent – WTI Spread
Front Month Brent - WTI Spread
$120
$115
$30
$20
$10
$105
$100
$0
$95
-$10
Spread in $/bbl
$/bbl
$110
$90
-$20
$85
$80
-$30
Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
Spread

Front Month WTI
Front Month Brent
In late June and early July, there has been a large drop in the open interest of WTI contracts while the front month Brent –
WTI spread has fallen to $3.00/Bbl currently. Nevertheless, the Louisiana Light Sweet (“LLS”) -WTI spread continues to sit at
$6-7/Bbl. If there was a true physical de-bottlenecking taking place, we would expect LLS pricing to fall relative to WTI. Of
course, we would also expect to see a decline in Cushing inventories, but this has yet to happen on a significant scale.
Source: Bloomberg, Raymond James
11
U.S. Waterborne Imports
Forecast to Decline Quickly
6.5 MMBbls/d Total Waterborne Imports
1.4 MMBbls/d Light & Medium Sweet Imports
Source: Plains All American Pipeline, LP
12
Light and Medium Crude in the
U.S. Oversupplied by 2016?
L/M/H
Sour
L/M Sweet &
Condensate
Total
Estimated Production Increase
1.0
2.4
3.4
Like-kind Foreign Waterborne Imports
(5.1)
(1.4)
(6.5)
Remaining Imports Available for
Displacement/Excess Supply
(Irrespective of Regional Imbalances)
(4.1)
1.0
(3.1)
(MMBbls/Day)
 1.0 Mil. Bbls/Day of L/M sweet crude & condensate without a readily-available market.
 In certain areas, light crudes may be priced at discounts to heavy or sour crudes to
incentivize consumption.
Source: Plains All American Pipeline, LP
13
Possible Solutions to Forecast
U.S. Sweet Crude Oversupply

Potential Upstream Solutions
Result
Reduce rate of drilling to allow declines to reduce supply
Negative for N.A. Service and E&P
Shut in producing wells until wellhead price recovers
Negative for N.A. E&P
Presidential permission to export light sweet crude
Positive for N.A. Service and E&P
Potential Midstream Solutions
Result
Increased long-haul shipments of condensate to Canada as diluent
Positive for Midstream Volumes
Rail, barge, truck and/or new pipelines to regions not yet out of balance
Positive for Midstream Volumes
Absorbing some light crude by blending with heavy crudes
Positive for Midstream Volumes
Installation of condensate splitters to qualify for export status
Positive for Midstream Volumes, Exporters of
Distillates and Naptha
Potential Downstream Solutions
Result
Increased usage of condensate by petrochemical companies
Increase in Demand is Positive for N.A. Service,
E&P and Midstream, Negative for Refiners
Refiners modify to accommodate more light sweet crude
Positive for Refiners (may require locking-in crude
supply at a discount)
With no additional light and medium sweet imports to push out of the market, solutions for the forecast
1.0 MMBbls/Day of L/M sweet crude & condensate without a readily-available market will need to be
implemented in the U.S. (OPEC supply reductions are not likely to be effective).
Source: Plains All American Pipeline, LP
14
Brent – WTI Spreads
Anticipated to Widen Again
Brent & WTI Forward Curves with Spread
$110
$9
$8
$105
$7
$6
Spread per Bbl
$/bbl
$100
$5
$95
$4
$90
$3
$2
$85
$1
$80
$0
Brent - WTI Spread

WTI Curve
Brent Curve
In anticipation of the decrease in U.S. waterborne imports and the migration of the Cushing bottleneck to the Gulf Coast, the
futures market anticipates a widening of the Brent – WTI price by early 2014. With no ability to export crude and no additional
refining capacity for light and medium crude, growing crude volumes may have difficulty finding a market. In this scenario,
which the market appears to be anticipating, both WTI and LLS will likely trade at a discount to international crude.
Source: Goldman Sachs, Simmons & Co.
15
Crude Oil Summary
Worldwide Supply & Demand
 Currently, the world market appears slightly oversupplied with OPEC producing more than 1 Mil.
Bbl/Day above what is required.
 Chinese oil imports are down slightly on a year over year basis and the IEA has warned about
lower demand growth rates.
Oil Prices
 Given fundamentals, oil prices appear to have more downside risk than upside potential.
 Nevertheless, high impact North American shales (Eagle Ford, Bakken) have fairly low breakeven
oil prices and should maintain activity as long as WTI prices do not persist below $70/Bbl for an
extended period of time.
Forecast U.S. Production Growth
 In a reversal of long-term oil project trends, U.S. oil shales outperformed forecast volumes in 2012.
 Assuming total U.S. production growth of approximately 850,000 Bbl/Day, U.S. light and medium
sweet crude will likely outstrip U.S. refining capacity in the next 3.5 years. Due to the prohibition on
the exportation of crude oil, approximately 1.0 Mil. Bbl/Day of light and medium sweet crude will
need to find a market or be suppressed by 2016.
16
Natural Gas Fundamentals
17
All Quiet on the
Natural Gas Curve
NYMEX HH Natural Gas Forward Curves
$5.0
$/MMBtu
$4.5
$4.0
$3.5
$3.0
Despite the short-term rise in natural gas prices as a result of a colder
than expected winter, front month prices have recently fallen due to
stable production and large storage injections. The natural gas curve
has been very stable in the past year as investors anticipate the market
to be well supplied at a price between $4.00 - $5.00.
$2.5
Current Curve
Source: Bloomberg
12/31/2012
6/30/2012
18
Natural Gas Production
Remains Elevated
EIA Form-914 Natural Gas Production
74
5%
4%
3%
Bcf/Day
2%
1%
70
0%
-1%
-2%
% Change from 2012
72
68
As anticipated, natural gas production has continued to
remain stable despite a fall in the rig count. Current
production is 72.7 Bcf/Day, down just -1.1 Bcf/Day from an
all-time high of 73.8 Bcf/Day in November ’12.
-3%
-4%
66
-5%
J
F
M
A
% Change from 2012
Source: EIA, Bloomberg
M
J
J
2012
A
S
2013
O
N
D
3 Year Avg
19
Natural Gas Shale Activity
Has Fallen Sharply
Baker Hughes U.S. Gas Rig Count
1,700
0%
1,600
-10%
1,500
1,400
-20%
-30%
1,200
1,100
-40%
1,000
-50%
900
800
% Drawdown
Gas Rig Count
1,300
Marcellus -46 Rigs (-36.5%)
-60%
700
-70%
600
500
-80%
400
300
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Gas Rig % Drawdown
Source: Bloomberg, Baker Hughes
Jul-11
Jan-12
Jul-12
Jan-13
-90%
Jul-13
Gas Rigs
20
Natural Gas Shale Activity
Has Fallen Sharply
Rig Count by Natural Gas Shale Play
400
350
Marcellus
Haynesville
Fayeteville
Barnett
300
250
Natural gas rig count is 354, of
which 161 (45.5%) are dedicated
to the natural gas shales.
200
150
Marcellus -46 Rigs (-36.5%)
100
Haynesville -110 Rigs (-75.8%)
50
Fayetteville -19 Rigs (-40.6%)
Barnett -47 Rigs (--59.5%)
0
Source: Bloomberg
21
Natural Gas Inventories Much
Improved Compared to 2012
EIA U.S Natural Gas Storage
4,000
40%
Storage injections have exceeded last year’s levels
for eleven consecutive weeks. This is not surprising
given that production curtailments in 2012 helped to
manage the volume of natural gas in storage.
3,500
30%
10%
3,000
Bcf
0%
2,500
-10%
-20%
2,000
-30%
1,500
-40%
J
F
M
A
M
% Change from 2012
Source: EIA, Bloomberg
J
J
A
2012
S
O
N
D
2013
22
% Change from 2012
20%
Total Natural Gas Consumption
is Much Higher on Weather
EIA U.S. Total Natural Gas Consumption
95
20%
For the first time in 2013, U.S. natural gas consumption was down on
a year over year basis. A return to more normal seasonal weather in
April moderated commercial and residential demand for natural gas,
but these still managed to post a slight year over year gain of +2.7
Bcf/Day in April. Industiral natural gas demand also continued its
trend of modest growth up +0.7 Bcf/Day over April of 2012. Growth
in these categories was offset by declines in natural gas demand
from electricity generation.
85
Bcf/Day
80
15%
10%
5%
75
0%
70
-5%
65
-10%
60
-15%
55
-20%
J
F
M
A
% Change from 2012
Source: EIA, Bloomberg
M
J
J
2012
A
S
2013
O
N
D
5 Year Avg
23
% Change from 2012
90
Reverse Coal to
Natural Gas Switching
EIA U.S. Electric Utility Natural Gas Consumption
40
30%
Bcf/Day
10%
30
0%
25
-10%
20
-20%
15
-30%
J
F
M
A
M
% Change from 2012

J
J
2012
A
S
2013
O
N
D
5 Year Avg
The rise in natural gas prices has caused electric utilities to switch from natural gas generation to coal. Year to date
natural gas demand from electric utilities is down an average of -2.8 Bcf/Day. In the month of April, natural gas demand
was down -5.2 Bcf/Day and marked the largest year over year decline in 2013. April marked a 21 month high for natural
gas pushing to as high as $4.40/MMBtu. This was higher than the price that we had previously indicated would lead to
reverse coal to natural gas switching. Subsequent to this demand response from electric generators, natural gas prices
have once again moderated and are currently near $3.60/MMBtu.
Source: EIA, Bloomberg
24
% Change from 2012
20%
35
Long-term Sources of Natural
Gas Demand (5-7 Years)
Source: Enterprise Products Partners LP
25
Natural Gas Summary
Natural Gas Supply & Demand
 The falling natural gas rig count has yet to significantly affect production U.S. levels.
 We believe that this is due to two major factors. First, the extreme increase in dry gas well
productivity in areas such as the Haynesville and Marcellus can add significant natural gas volumes
with relatively few rigs. Second, oil and NGLs can add significantly to a gas well’s economics.
Natural Gas Prices
 After a bump in winter heating demand for commercial and residential use, natural gas prices are
re-settling into a range below $4.00/MMBtu as inventory levels grow seasonally.
 These levels are near the price at which reverse coal to gas switching occurs, dampening the
demand for natural gas demand for electric generation.
Waiting for Sustainable Increases in Natural Gas Demand
 Sustainable rises in natural gas demand will come from an increase in industrial demand, electric
generation and LNG exports.
 However, these are mid to long-term changes in natural gas demand growth that will occur slowly
over the next several years as projects are slowly completed.
Source: Plains All American Pipeline, LP
26
Natural Gas Liquids Fundamentals
27
NGLs (Ethane, Propane, Butane)
Used for a Variety of Products
Methane
Ethane
Raw
Natural
Gas
Natural
Gas
Processing
Products
Pipeline
Ethylene
Propane
Butane
Propylene
Glues, PCB,
Car Parts,
Paints, Glues
Benzene
Nylon,
Suitcases,
Auto Parts
Steam
Cracker
Naphtha
Butadiene
Gas Oil
Benzene
Crude Oil
Petroleum
Refinery
Toluene
Xylenes
Produced by cracking any of the optional feeds
Produced only by cracking any of the liquid feeds
PVC Pipes,
Plastics, Tires,
Auto Parts, Air
Conditioning
Tires, Home
Electricals,
Auto Parts
Home
Electricals,
Auto Parts
Solvent
Solvents,
Rubber,
Leather
28
Ethane Rejection to Continue
Despite Increases in Demand
U.S. Ethane Production Forecast
Actual
Source: RBN Energy
Forecast
29
Variety of Ethylene Projects Take
Advantage of NGL Oversupply
Source: Enterprise Products Partners LP
30
U.S. Ethylene Plants Have a
Significant Global Cost Advantage
Source: Enterprise Products Partners LP
31
Propane Market Dependent
on Growing Exports
U.S. Propane Production Forecast
Actual
Source: RBN Energy
Forecast
32
U.S. to Become Top
Propane Exporter
Source: Enterprise Products Partners LP
33
NGL Summary
Ethane
 Surplus supplies due to increases in production from gas processing
 Near permanent state of rejection
 Likely to continue to price below the price of natural gas (adjusted for
transportation and fractionation costs)
Propane & Butane
 Surplus supplies due to increases in production from gas processing
 Gulf Coast exports required to balance the market
34
MLP & Midstream Fundamentals
35
MLP Highlights
MLP Qualification
 An MLP must generate at least 90% of its income from “qualifying sources”.
1.
2.
3.
4.
5.
Interest, dividends and capital gains
Rental income and capital gains from real estate
Income and capital gains from natural resources activities
Income from commodity investments
Capital gains from the sale of assets used to generate income from 1-4
Relation to Energy
 A variety of energy related businesses fit this definition, but historically midstream companies with
long-lived assets generating predictable and stable cash flows with minimal commodity price risk
utilized the MLP structure. These businesses include:
1.
2.
3.
4.
Gathering and processing
Compression
Transportation via Pipelines
Storage, Terminals and Marketing
36
MLP Highlights
Relation to Energy (Con’t)

However, the structure has gained popularity and is now being utilized by businesses with
greater commodity price risk and more volatile income streams including:
1.
2.
3.
4.
5.
Mining (Coal)
Marine Transportation
Propane Distribution
Exploration, Development and Production
Oil & Gas Service Materials
Distributions
 There is no minimum percentage distribution of cash flow mandated by U.S. tax law for MLPs.
Rather, the partnership agreement mandates that MLPs distribute all available cash flow.
Tax Advantages
 MLPs are pass-through entities that pay no corporate level federal taxes. Taxes are paid by
limited partners as if they were directly earning the income. Benefits include:
1.
2.
3.
4.
There is no double taxation
A significant amount of income is sheltered primarily because of depreciation expense.
(Tax Shelter % = Depreciation Allocation/Distribution)
Cash distributions are treated as a tax deferred return of capital. (Cost Basis is reduced by
cumulative depreciation at time of sale.)
Favorable estate tax treatment
37
Typical MLP Structure
Corporate Sponsor
Limited Partners (“LPs”)
Public Investors
Common Units
Asset
Dropdowns
100%
General Partner (“GP”)
2% + Incentive Distribution Rights (IDRs)1
Master Limited
Partnership (“MLP”)
100%
1 The
general partner typically owns IDRs that entitle the GP to
a higher proportion of distributions as certain target distribution
levels are reached to motivate the general partner to manage
the MLP for distribution growth.
Operating Limited
Partnership (Assets &
Operations)
38
MLPs by Asset Risk
Natural Gas Pipelines and Petroleum Pipelines and
Storage
Terminaling
Type of Business
Mostly fee based business,
Mostly fee based
but gathering systems are
businesses based on
highly leveraged to specific
Fee based businesses that
volumes, but companies
plays and volumes are
are dependent on charging
deal in a number of
dependent on production
a fee per unit of volume.
products (NGLs) that may
from a given region.
This may include
necessitate purchasing the Processing also can require
transporting volumes
commodity, storing and
to purchase natural gas and
through a pipeline or storing
selling it at a later date.
sell ethane, propane and
natural gas volumes.
Companies hedge a portion butane. Again, companies
of the commodity price risk
can hedge this price risk
from these activities.
based on expected
volumes.
Yields
Key Risks
Midstream/Gathering &
Processing
4.0 - 5.5%
4.0 - 5.5%
Lower throughput and
storage volumes can have a
Lower throughput and
negative effect on fees.
storage volumes can have a
Margin based revenue is
negative effect on fees.
subject to commodity price
risk.
Less Risk
Source: EIA, Bloomberg
5.5 - 6.5%
Development of particular
regions will drive volumes
and fees. Margin based
revenue is subject to
commodity price risk.
Propane
E&P
Propane transportation and
storage is part of many
MLP's business, but this
class of MLPs usually refers
to companies that generate
a high percentage of
propane sales to retail
clients. Thus, these MLPs
have margin exposure from
purchasing inventory and
selling propane. Again, at
least some of this
commodity price exposure
can be hedged.
Developed, long-lived oil
and gas reserves with
shallow decline rates are
often dropped into an
upstream MLP. However,
the decline rate, large
amounts of capital required
to add production, and
commodity price risk makes
upstream MLPs potentially
risky. Upstream MLPs
hedge aggressively to
mitigate commodity price
exposure.
6.5 - 7.5%
8.0 - 12.0%
Productivty of new wells
Sales to retail customers
and decline rates of legacy
are vulerable to short-term
assets will affect distribution
demand shifts. Margin
and growth rates. Revenue
based revenue is subject to
is subject to fluctuations in
commodity price risk.
commodity pricing.
More Risk
39
MLP Ownership
MLP Ownership Split Over Time
Percent Ownership
100%
75%
23%
22%
2%
4%
23%
26%
29%
30%
10%
9%
7%
5%
65%
67%
65%
64%
65%
2008
2009
2010
2011
2012
28%
28%
7%
7%
65%
2007
50%
76%
74%
25%
0%
2005
2006
Retail
Foreign
Institutional
UBTI (Unrelated Business Taxable Income): Investment income generated by tax-exempt institutional funds such
as pensions, endowments and 401(k) plans is considered consistent with these funds’ purpose. However, income
generated from the operation of a business (MLP) is considered unrelated to the exempt function of pensions,
endowments and 401(k) plans and is classified as UBTI. To the extent UBTI exceeds $1,000, the otherwise exempt
entity will be required to pay income taxes at trust rates.
Source: Wells Fargo
40
Yield in the Energy Sector
U.S. Royalty Trusts
E&P MLP's
African E&P's
Small Canadian E&P's
Mid Canadian E&P's
Gas Transportation, Gathering & Processing MLP's
Gas Gathering & Processing MLP's
Refined Product MLP's
South American E&P's
Oil Transportation & Storage MLP's
Mega Cap Integrated w/o U.S. Downstream
Large Canadian E&P's
Coal
Large Cap Pipelines & Diversified
Offshore Drillers
Super Independents Outside N.A.
Former Soviet Union E&P's
Refiners & Marketers Outside N.A.
Large Cap Integrated w/o U.S. Downstream
Integrated w/U.S. Downstream
Mid Cap Pipelines & Diversified
Wind
Small U.S. E&P's
Middle East E&P's
Onshore Drillers
Mid U.S. E&P's
Geophysical
Nuclear
Alternative Fuels
Super Independents
N.A. Refiners & Marketers
Offshore Marine Services
UK & North Sea E&P's
Large Cap Service & Equipment
Independent Power Producers
East Asian E&P's
Mid Cap Service & Equipment
Small Cap Service & Equipment
Engineering & Construction
Micro U.S. E&P's
Large U.S. E&P's
Australia E&P's
European E&P's
Geothermal
Fuel Cells
Solar
 As shown, the higher yielding subsectors are
primarily the MLP subsectors. The U.S. Royalty
Trusts sport the highest yields. We have recently
researched the Royalty Trusts and our two primary
observations are:
1. this subsector is likely dominated by retail
investors/retail financial advisors in
response to low yields throughout the fixed
income arena,
2. the business and financial structure of
these trusts varies widely, making in-depth
research and comparability difficult,
3. valuations of the petroleum reserves of
some of these trusts are very high and
considerably beyond what we consider
reasonable.
 Within the MLP sector, the E&P MLPs have the
highest yields. This reflects the oil and gas price
risk associated with the cash flows.
 The Transportation, Gathering and Processing
subsectors all have approximately the same yield
levels. This is due to the high fee based
component of the cash flows and lack of significant
commodity price exposure.
0.0
Source: Bloomberg
2.0
4.0
6.0
8.0
Median % Yield
10.0
12.0
14.0
41
MLP Yields
20.0
CHKR
WHZ
18.0
SDR
ECT
SDT
16.0
14.0
PER
Yield in %
LRE
12.0
MEMP
BBEP
EROC
10.0
NKA
NS
8.0
BWP
6.0
ETP
RGP
TGP
APL OKS
DPM SEP
EPD
4.0
AMID EXLP
TCP
PNG
WPZ
CMLP
CLMT
KMP
CQP
XTEX NGLS
NRGY
WES
PAA
GEL TLLP
SXL
EQM
DOM
BPT
NRT
MCEP
CRT
PBT
MMLP
EEP
TLP
BPL
EPB
CPNO
MWE
VNR
ARP LGCY
LINE
EVEP
QRE
MVO
HGT
GLP
HEP
SBR
PSE
RRMS
MMP
MTR
SJT
2.0
0.0
Gas Transportation,
Gathering & Processing
MLP's
Source: Bloomberg
Gas Gathering &
Processing MLP's
Oil Transportation &
Storage MLP's
Refined Product MLP's
E&P MLP's
U.S. Royalty Trusts
42
Other High Yielding
Energy Sub-sectors
10.0
TUPRS TI
9.0
ELPE GA
SIBN RM
8.0
ROSN RU
7.0
ECOP CB
ENI IM
TOT FP
Yield in %
6.0
BP LN
STL NO
RDSA LN
5.0
GAZP RM
China P&C
CVI
BHP AU
SOL SJ
4.0
PetChina
PTT TB
DUK
STR
OMV AV
CVX
3.0
REP SM
LKOH
RM
XOM
ENB
IOCL IN
MOL HB
GAS
KMI
WMB
D
CMS
OKE
STR
HFC
MDU
HPCL IN
NES1V FH
S-Oil
BPCL IN
PKN PW
NFG
2.0
SNGS RU
MUR
GALP PL
BG LN
EGN
VLO
PSX
DKASH
TSO MPC
WNR
ALJ
RIL INSK Corp
1.0
HES
0.0
Integrated w/U.S.
Mega Cap
Large Cap
Downstream
Integrated w/o U.S. Integrated w/o U.S.
Downstream
Downstream
Source: Bloomberg
Large Cap
Pipelines &
Diversified
Mid Cap Pipelines
& Diversified
N.A. Refiners &
Marketers
Refiners &
Marketers Outside
N.A.
43
MLPs Are Delivering on
Distribution Growth
Q1 2013 YoY And Sequential Distribution Growth by MLP Sector
YoY Distribution Growth
18.4%
Sequential Distribution Growth
20.0%
15.0%
8.3%
10.0%
6.9%
6.8%
6.8%
5.1%
5.2%
5.0%
5.0%
1.2%
All MLPs
0.0%
Coal
Marine transportation
Upstream
0.5%
Propane
1.2%
Gather / process
GPs (MLP)
Source: Wells Fargo
1.1%
Small cap pipeline
1.3%
0.6%
2.2%
Oilfield Services
1.4%
2.3%
Large cap pipeline
0.0%
2.6%
GPs ( C- Corps)
Q1'13 Median Distribution Growth
25.0%
44
Crude Infrastructure is Designed to
take Volumes from South to North
Source: Enterprise Products Partners LP
45
Production in Unconventional
Basin Stresses Infrastructure
Source: Enterprise Products Partners LP
46
Reversal of Crude Flows
Creates Opportunities
Source: Enterprise Products Partners LP
47
Opportunities for
Pipeline MLPs
Historical and Forecasted Organic MLP1 Capex Investments
Organic Capex Investments ($ in billions)
$35.0
$30.0
$28.8
$25.0
$22.1
$20.3
$20.0
2013 – 2017
Average $20.3 Bil.
$17.8
$17.3
$17.5
2015E
2016E
2017E
$16.5
$15.0
2008 – 2012
$14.7
Average $14.8 Bil.
$13.3
$11.1
$9.7
$10.0
$5.5
$5.0
$2.7
$2005
1
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
Includes 64 MLPs under Wells Fargo coverage.
Source: Wells Fargo
48
Natural Gas Related
Opportunities for Pipeline MLPs
Source: INGAA Foundation
49
Example of Company
Specific Opportunities (EPD)
2Q 2013
NGL Pipeline & Services
Texas Express (JV) Gathering system – Phase I
Texas Express (JV) NGL pipeline – Skellytown to Mont Belvieu
Mont Belvieu NGL Expansions
South Carlsbad pipeline expansion
Mont Belvieu NGL Fractionators 7 & 8
Front Range (JV) NGL Pipeline
ATEX Express Ethane Pipeline – Marcellus/Utica
Mid-America NGL Pipeline Expansion – Rocky Mountain segment
Aegis Ethane Header Pipeline – 270 miles
Onshore Crude Oil Pipelines & Services
North Loop extension
Avalon–Bone Spring Gathering (Phase II)
Eagle Ford Plains JV–- Crude Oil Pipeline
ECHO storage expansion 900 MBbls
Seaway (JV) Crude Oil pipeline expansion
ECHO expansion to 4 MMBbl
Petrochemical & Refined Products Services
MTBV PP Splitter IV expansion
Propane Dehydrogenation Unit
Other
Offshore Pipelines & Services
Offshore Lucious Crude Oil Pipeline SEKCO JV
Onshore Natural Gas Pipelines & Services
Stateline Gathering System - Capacity Expansions
Value of Remaining Capital Projects to be Put in Service by Period:
Total:
Source: Enterprise Product Partners, LP
3Q 2013
4Q 2013
2014
2015
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
0.2
0.9
0.7
√
4.6
1.1
7.5
50
MLP Risks: Inflation Leads
to Higher Interest Rates
 An increase in inflation would likely be accompanied by an increase in interest rates, which would
raise yields for alternatives to MLPs such as government and corporate bonds. These risks of
inflation and interest rate increases are partially mitigated by:
1.
An increase in inflation would likely be associated with an increase in oil prices, which would
keep oil drilling activity high and thus spur continued need for infrastructure expansion.
2.
Many pipeline transportation contracts have annual inflation adjustment provisions regarding
the pipeline tariffs, usually linked to the Producer Price Index plus a margin.
3.
Also, historical increases in MLP distributions have exceeded increases in the Consumer Price
index.
 The MLP sector typically does suffer a decline in market valuations in connection with concerns of or
actual higher interest rates. However, the sector tends to regain value quickly. This is due to the
sector’s history of increases in distributions, a favorable feature when compared to the fixed coupons
of government and corporate bonds.
51
MLP Risks: Change in
MLP Tax Treatment
 Fears of changes in tax treatment infected the MLP sector following the November 2012
U.S. Presidential election. The Alerian MLP index sunk over 8% in the two weeks following
this event.
•
While rumors abounded at that time, there continues to be no evidence of concrete
efforts to effect a change in the tax treatment of MLPs.
•
Our research on this matter consists of correspondence with sell side MLP analysts
and with the National Association of Publicly Traded Partnerships (NAPTP).
•
In fact, there seems to be evidence of less motivation for tax reform in the U.S. The
debt ceiling has recently been pushed out to October 2013 and perhaps will be
pushed out again.
•
Also, legislation was recently introduced to allow wind, solar and other alternative
energy companies to qualify for MLP status.
52
MLP Risks: Slowing of North American
Oil & Gas Production Growth
 We regard this as a longer term risk, as the large amount of infrastructure build out
currently planned (projects scheduled for in service dates between 2013 and 2016) is
based on wells that have already been drilled and completed.
•
However, if the petroleum complex experienced a material decline in prices this would
likely slow the pace of drilling and the need for additional build out of natural gas and
crude oil infrastructure.
•
A downturn in new well productivity would also dampen the long-term demand for
infrastructure. This is mitigated by the trend of improving well results in the largest
(Eagle Ford, Bakken) unconventional plays.
53
Midstream Summary
MLP Yields
 MLPs currently offer higher yields compared to 10 year U.S. treasuries, investment grade bonds
and high yield bonds. The MLP yield spread versus each of these assets is above 5-year
averages.
 MLPs have delivered YoY distribution growth of 5.1%, but pipeline MLPs have exceeded this level
of growth in the past year.
MLP Fundamentals
 U.S. natural gas, NGL and crude production is growing quickly from unconventional oil and gas
production. The surge in production is creating transportation, storage, processing, and export
opportunities for midstream companies.
MLP Risks
 Rising interest rates, a change in tax structure and slowing U.S. production are significant risks to
MLP valuations.
 However, we believe that these risks are mitigated by reasonable MLP yield spreads, lack of MLP
political opponents and U.S. production growth that has exceeded expectations.
54