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Permian Basin 2018

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PERMIAN BASIN: MIDSTREAM 60 | October 2018 | hartenergy.com Among small and mid-caps TPH covers, the team cited WPX Energy Inc., PDC Energy Inc., Parsley Energy Inc., Encana and Diamondback Energy Inc. as "best positioned in our coverage to weather the storm in 2019." KeyBanc's Deckelbaum liked Parsley, Oasis Petroleum Inc. and Pioneer Natural Resources Co. Yet, he warned: "While we believe Permian chal- lenges may be temporary, being selective has never been more critical." Getting Brent Bernstein's Brackett named Pioneer as "furthest ahead of the bunch. For quarter-after-quarter now, we have heard Pioneer talk about how many cargos they exported. It seemed kind of cutesy and less relevant four or five quarters ago. "Now it's clearly a source of competitive advan- tage where they're delivering 160,000 bbl/d of the Permian straight to the Gulf Coast, exporting about half of it and getting Gulf Coast refinery prices for the other half." According to Pioneer, its exported portion is expected to grow in this half from 110,000 bbl/d to 150,000 bbl/d. Capital One Securities Inc. E&P analysts wrote, "Pioneer looks to have the most advantaged market- ing position out of any Permian producer, as far as we can tell." Having firm transport to the Gulf Coast, "the vast majority of [its] barrels are getting premium pricing to WTI rather than a noticeable discount." Its firm transport to the Gulf is on more than 90% of its expected production through 2021. "We are not aware of any other Permian producer that can make such an emphatically positive claim," they added. KeyBanc's Deckelbaum added that Parsley is get- ting a third of its production to the Gulf and PDC "has tied most of its Delaware crude volumes to the Gulf Coast as well." Seaport Global Securities LLC (SGS) analysts found that PDC's "takeaway position is more favor- able than widely understood." Its contracts have 85% of its Delaware output going to the Gulf Coast this and next year. " … We believe many may have underappreciated how insulated the company will be as Mid-Cush diffs take their toll on the Permian-levered group." The SGS team noted that Diamondback bought some firm transport in mid-June to switch from none of its oil on contract to 66% in this half, 70% in 2019 and 100% in 2020. "In order to make this happen, Diamondback gets dinged with a hefty transport/ marketing fee over the next two years," they added. Under the contracts, Diamondback's average discount to the Gulf Coast price is between $14 and $17/bbl. In 2019, it's between $10 and $12; in 2020, $5. The SGS analysts estimate a net effect on Diamondback's EBITDA of some 8% less for this half and some 4% less in 2019, but some 4% greater in 2020. Implications for M&A Jefferies' Marko told Oil and Gas Investor the basis situation in the basin may chill M&A activity there. "I think it will mean lower valuations because people are going to grind those [differentials] in. Certainly, the buyers are going to grind those in. And I think it will make the sellers reluctant to sell because they don't want to be schmucks who sell now and, in a year, it gets cleaned up and they've lost $15 a barrel. "Any time there is uncertainty and risk, it chills things a bit. I think it's just another bit of a head- wind into the amount of deals we see." Bernstein's Brackett told clients in May, "If val- uations were to be punished enough, look at it as a tool for industry consolidation. We've talked about that previously—that there is a scale that matters in the Permian: the ability to run enough rigs, ability to be able to call Halliburton [Co.] and secure a frack fleet, the ability to be an anchor on a pipeline takeaway project. "So," Brackett continued, "this congestion in the Permian might have the unintended consequence of consolidating the basin and actually making it stronger on the way out. In that case, we would be interested in any stocks that are overly punished for what ultimately should be a multiquarter misstep as opposed to a long-term net-asset-value story." The situation may redirect some spending. Capital One Securities analysts reported in early June, after visiting with E&Ps in Houston, that Permian takeaway and WTI Midland differentials "are currently, by far, the biggest themes/concerns in the E&P space." They estimate a "likelihood for companies to expand

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