Delay or no delay? What are the implications? Late on Thursday, February 2, 2017, FERC approved the Rover Pipeline Project. While FERC approved the project itself, which is slated to be online this summer, Rover did not escape unscathed from the permitting process. FERC denied Rover a portion of their blanket certificate, which will not allow them the usual authority a pipeline has to complete maintenance activities without conferring with FERC. Additionally, Rover has only until March 31 to fell necessary trees along the right of way. Rover has received permission to cut (fell) the trees, but may not start clearing the cut trees or any kind ground-disturbing activities prior to receiving all of their water permits. Genscape currently believes that Rover will most likely will be delayed and will not be able to meet its current in-service date of July 2017. In the worst case, if cutting trees gets pushed out of this year's window, or eminent domain (required for full construction) becomes a major problem and the project could be delayed a year.
In this blog, we look at the implications that a delay would have on various players in the region.
It is important to understand Energy Transfer's (Ticker: ETP) Rover pipeline project to grasp its impact on ET's gathering assets, producers, and other third party gas processors in this infrastructure constrained region.
Impact on Energy Transfer's Gathering Assets
Back in 2015, Energy Transfer acquired Regency Energy Partners, a company which operated natural gas gathering networks in the Marcellus. Regency was building a new gas gathering project in the Utica called the Ohio River System (ORS) project, which had an in-service date for its first phase in Q2'15. ET operates the system with 75 percent equity stake, and the remaining 25 percent by Traverse Midstream (previously known as American Energy midstream). ORS has a total capacity of 2.1 Bcf/d and delivers gas to both REX and TETCO. ORS complements Rover interstate gas pipeline and its completion will further benefit ET, as ORS's capacity will be increased to 3.5 Bcf/d due to a tie-in with Rover. Rover's delay would negatively affect ET's gathering throughput volume, leaving it constrained at the lower 2.1 Bcf/d figure.
Energy Transfer's Ohio River system map, including the Rover project, Rockies Express, TETCO, and Dominion pipelines. Click to enlarge
Impact on Producers
Ascent Resources (previously known as American Energy) plays a significant role in both these projects - gathering and interstate. Currently, Ascent uses ORS as its primary dry gas gatherer. Ascent holds half (200 MMcf/d) the processing capacity at MPLX's Cadiz Processing Plant, which is directly connected to ORS. ORS helps Ascent move its dry gas from the wellhead and residue gas from Cadiz to REX, TETCO (delivers to ANR), and Dominion (delivers to ANR) interstate pipelines. With our Equity Insight product, Genscape estimates that Ascent produced an average of 370 MMcf/d in Q4'16. They currently have capacity of 185 MMcf/d on DTI, 746 MMcf/d on ANR, and 450 MMcf/d on REX. However, their real takeaway capacity is 635 MMcf/d, as their flows on ANR is limited by what they hold on DTI. Currently, Ascent has 101 producing wells and 24 permitted but undrilled wells. Ascent also has 44 Utica DUCs, which is more than any other company.
Now looking to Rover, Ascent has 1.1 Bcf/d of capacity on the project, or approximately one third of the total pipeline, which would bring their total future takeaway capacity to 1.7 Bcf/d once the project is completed. In November 2016, Ascent raised $787 million of new capital, out of which $175 million will be used to develop wells in the Utica. However, even if they bring all the DUCs online and drill and complete their permitted wells, they will not be able to fill their current takeaway capacity if Rover comes online on time. Since Ascent has a firm commitment on Rover of about 1.1 Bcf/d, Genscape sees three scenarios:
- Monetize their unused capacity by letting other producers' distressed gas flow through it and essentially help "drain the pool."
- Drill, complete, and bring online more new wells to help fill the capacity. However, this will require a big CAPEX budget.
- Pay the firm commitment fees through an equity or debt offering.
Genscape believes it is in Ascent's favor if Rover gets delayed by another year to give them more time to build up their production volumes.
On the other hand, Antero Resources (Ticker: AR) has 148,000 net acres in the rich gas/condensate window of the Utica and has 800 MMcf/d of capacity on Rover. They currently process all of their Utica gas at MPLX's Seneca Processing Plant, where they own the majority of the capacity. However, their production in Utica, through REX, is capped at 600 MMcf/d despite the plant having 800 MMcf/d of capacity. The reason being is that the lateral connecting Seneca to REX has a capacity of 600 MMcf/d, limiting Antero's production levels.
The next inflection point for their Utica production is when Rover comes online, which will build a lateral connecting to the tailgate of Seneca. Once Rover and this lateral are placed in service, Antero will be able to grow their wet Utica production another 200 MMcf/d, and then they will be constrained until MPLX increases capacity at Seneca.
Based on the current forward prices, Antero's wells are highly economic. Genscape's most recent quarterly breakeven report estimates a wellhead breakeven of $1-1.50/mcf depending on the location of the well. In addition to Seneca, Rover also has a 36-inch lateral planned from Clarington to MPLX's Sherwood Processing Plant which processes all Antero's wet gas from West Virginia. At Sherwood, Antero has room to increase production by another 100 MMcf/d at current plant capacity. However, MPLX has announced a 400 MMcf/d expansion at Sherwood which will be fully in service by the end of 2017. Antero's 2017 D&C capital budget is $1.3 billion, of which 30 percent allocated to Ohio Utica Shale and the remaining to West Virginia Marcellus, and plans to grow production at least 20 percent in 2017. Therefore, Genscape believes a delay in Rover's in-service date would add risk to Antero's production growth.
Further delay in the in-service date of Rover is bound to affect Energy Transfer negatively, but there are knock on effects for producers and other midstream companies. It will slow natural gas production growth for producers such as Antero, as well as other midstream players such as MPLX who would benefit from the increase in gas production that will be unleashed by Rover coming online.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.