July 24, 2018 | Equity Research

The Basin Book: Supply Vs. Takeaway

Midstream/MLPs
Permian, Anadarko, Northeast, Bakken,
Natural Gas
Niobrara, Eagle Ford & W. Canada

 Summary. We are updating our supply versus takeaway analysis for all
basins and commodities we have analyzed to date: Permian (oil, gas,
NGLs, processing), Anadarko (oil, NGLs, processing), Marcellus/Utica
(gas, NGLs, processing), Bakken (oil, NGLs, processing), Niobrara (oil,
NGLs), Eagle Ford (oil), Western Canada (oil), and Cushing (oil).
Underlined sections represent new additions to The Basin Book.

 Supply Versus Takeaway Tightening. Supply vs. takeaway

tightened across a number of basins/commodities that we analyzed
relative to our last update in February 2018. What changed? Production
is growing at faster pace than we projected and new pipeline projects
are taking longer to reach FID (due to increased competition in some
regions and regulatory delays in others). On the basis of our analysis,
15 out of 18 basins/commodities that we analyzed are projected to
require additional infrastructure over the next 5 years (versus 8 out of
12 in our February 2018 update). In total, we see the need for
additional pipeline takeaway of 3.3 MMBbls/d of crude, 5.1 Bcf/d of gas,
0.5 MMBbls/d of NGLs, and 7.3 Bcf/d of additional processing
expansions. The basins with the greatest change and/or most acute
takeaway constraints are listed below.

 Permian Oil. We forecast Permian oil takeaway to be heavily

constrained through Q1’20E (versus Q3’19E in our prior Basin Book
update). There are at least 7 potential pipeline projects under
evaluation. In total, we see the need for an additional 1,000-1,500
MBbls/d of crude takeaway capacity, suggesting only 1-2 of these
potential pipelines may be constructed. Of the larger potential projects,
we believe ETP/MMP and PAA/XOM’s potential pipelines have the
greatest chance of reaching the finish line. Companies best positioned
to capture wider Permian oil differentials include EPD, ETP, and PAA.
Michael Blum
 Permian Gas. We project gas takeaway in the Permian to be heavily Senior Analyst|212-214-5037
constrained between Q3’18 and Q3’19, temporarily in balance in Q4’19- michael.j.blum@wellsfargo.com
Q1’20, when the Gulf Coast Express pipeline starts up, but constrained Sharon Lui, CPA
again starting in Q2’20. There are at least 9 potential pipeline projects Senior Analyst|212-214-5035
under evaluation. In total, we see the need for an additional 2-3 Bcf/d sharon.lui@wellsfargo.com
of gas takeaway capacity, suggesting only 2 of these potential projects Praneeth Satish
could reach FID. Of the potential pipelines, we believe the Permian Senior Analyst|212-214-8056
Highway Pipeline (PHP) project is most likely to proceed. Companies praneeth.satish@wellsfargo.com
best positioned to capture wider Permian gas differentials, in our view, Ned Baramov, CFA
include EPD, ETP, and KMI. Senior Analyst|212-214-8021

 Niobrara Crude Oil. We forecast that crude takeaway out of the ned.baramov@wellsfargo.com
Niobrara will become constrained beginning in Q2’20E. To note, in our Eric Shiu
previous analysis (from February 2018), we estimated the region to be Associate Analyst|212-214-5038
modestly overbuilt over the entire 5-year period analyzed. The change eric.shiu@wellsfargo.com
from overbuilt to constrained is driven by a higher production forecast, Zachary Cantor
and the partial conversion of the White Cliffs pipeline to NGL service. Associate Analyst|212-214-5050
This is a long-term potential positive for midstream companies with z a c h a r y . c a n t o r @ we l l s f a r g o . c o m
pipeline assets in the region (MMP, NGL, SEMG, SEP, and TGE).

Please see page 112 for rating definitions, important disclosures and
required analyst certifications. All estimates/forecasts are as of 07/24/18
unless otherwise stated. 07/23/18 16:25:46 ET

Wells Fargo Securities, LLC does and seeks to do business with companies covered
in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of the report and
investors should consider this report as only a single factor in making their
investment decision.
Midstream/MLPs / Natural Gas Equity Research

Summary Of Infrastructure Needs By Basin & Commodity

Takeaway across the basins analyzed is tightening relative to our last update. Of the 18
basins/commodities we analyzed, 15 require additional infrastructure (i.e., above what has already been
announced) by the 2023E time frame. In contrast, in our last Basin update report in February 2018, 8 out
of the 12 basins/commodities we analyzed needed more infrastructure. In general, tight takeaway is a
long-term positive tailwind for midstream companies as it suggests increasing utilization rates / upward
rate pressure on existing assets and future capital investment opportunities.

In total, assuming midstream companies add sufficient takeaway to reduce pipeline utilization to a level of
90% and processing utilization to 100%, we see the need for 3.3 MMBbls/d of additional crude takeaway,
5.1 Bcf/d of additional gas takeaway, 0.5 MMBbls/d of additional NGL takeaway, and 7.0 Bcf/d of
additional processing expansions.

Exhibit 1. Incremental Infrastructure Needs By Basin & Commodity (2023E Snapshot)

Long-Term Infrastructure Needs (2023E)
Basin Crude Oil Natural Gas NGLs Processing

Permian 1,392 MBbls/d 2,578 MMcf/d 101 MBbls/d 1,483 (b) MMcf/d

Anadarko (SCOOP/STACK) 157 MBbls/d - 46 MBbls/d 1,556 MMcf/d

Northeast (Marcellus/Utica) - 2,563 MMcf/d 329 MBbls/d (a) 3,918 MMcf/d

Bakken 484 MBbls/d - Sufficent Sufficent

Niobrara (DJ Basin) 182 MBbls/d - Sufficent -

Eagle Ford 182 MBbls/d - - -

1
W. Canada 519 MBbls/d - - -

Cushing 410 MBbls/d - - -

Total Infrastructure Needs 3,326 MBbls/d 5,140 MMcf/d 475 MBbls/d 6,957 MMcf/d
Note: Figures are based on supply versus takeaway projections for 2023 and reflect infrastructure needs beyond projects
already announced and proceeding.
Note: The above infrastructure needs are based on a long-term utilization rate of 90% for pipelines and 100% for
processing plants.
Note 1: Analysis of heavy crude supply versus takeaway.
Note a: Assumes utilization for ME2/ME2X is capped at 50% due to limited disclosures
Note b: Reflects infrastructure needs in the Midland Basin; Delaware Basin looks sufficient
Source: Wells Fargo Securities, LLC estimates

New To Our Analysis: Basin-To-Basin Pipeline Flows. We’ve updated our Basin Book models to apply
basin-wide utilization estimates to pipelines leaving a basin and terminating in another basin that we are
modeling. For example, we project Bakken crude oil pipelines to be 94% utilized in 2018. Accordingly,
we’ve assumed a 94% utilization rate on Bakken pipelines flowing into the Niobrara region. Previously, we
included the total capacity of pipelines originating and terminating in basins that we analyzed. While not
exact (as individual pipelines could be more or less utilized than the basin as a whole), we believe this
provides a more accurate portrayal of basin-to-basin pipeline flows than our previous capacity-based
methodology.

Note On Maps.

 Blue lines = pipelines in service

 Red lines = pipelines under construction

 Orange lines = pipelines delivering hydrocarbons into the region from another basin

2 | Wells Fargo Securities, LLC

The Basin Book: Supply Vs. Takeaway Equity Research

Summary By Basin
Permian Oil. We forecast Permian oil takeaway to be heavily constrained through Q1’20 (versus Q3’19 in
our prior Basin Book update). There are at least 7 potential pipeline projects under evaluation. In total, we
see the need for an additional 1,000-1,500 MBbls/d of crude takeaway capacity, suggesting only 1-2 of
these potential pipelines will likely be constructed. Of the larger potential projects, we believe ETP’s/MMP’s
and PAA’s/XOM’s potential pipelines have the greatest chance of reaching the finish line. Companies best
positioned to capture wider Permian oil differentials, in our view, include EPD, ETP, and PAA.

Permian Gas. We project gas takeaway in the Permian to be heavily constrained between Q3’18 and
Q3’19, temporarily in balance in Q4’19-Q1’20, when the Gulf Coast Express pipeline starts up, but
constrained again starting in Q2’20. There are at least 9 potential pipeline projects under evaluation. In
total, we see the need for an additional 2-3 Bcf/d of gas takeaway capacity, suggesting only 2 of these
potential projects could reach FID. Of the potential pipelines, we believe the Permian Highway Pipeline
(PHP) project is most likely to proceed. Companies best positioned to capture wider Permian gas
differentials, in our view, include EPD, ETP, and KMI.

Permian NGLs. NGL takeaway could become tight by the end of 2022. While Permian NGL production
growth has outpaced our initial projections, EPD increased the capacity of its Shin Oak pipeline project by
300 MBbls/d, largely offsetting the growth in liquids production. Long term, we see the need for ~100
MBbls/d of incremental takeaway capacity over the next 5 years, assuming all projects under construction
are completed on time. This suggests only one of the following potential expansions/newbuild pipelines
are needed: Grand Prix expansion, Sand Hills expansion, West Texas LPG expansion, Companero,
Rawhide, and South Texas Gateway. As noted, we project that all NGL pipes in the Permian could
eventually become full. This is a positive for DCP, EPD, and ETP, in our view.

Permian Processing. The ongoing build-out of processing capacity in the Delaware Basin appears
sufficient to address growing production in the region. However, we believe more infrastructure is needed
on the Midland side of the Permian as processing capacity could get tight by mid-2019. We see the need
for up to 2.0 Bcf/d of additional processing expansions in the Midland. We believe this bodes well for ETP,
DCP, and TRGP.

Anadarko Oil. Takeaway in the SCOOP/STACK portion of the Anadarko Basin could become tight by
H1’20, suggesting the need for ~160 MBbls/d of additional pipeline takeaway over the next five years.
This is a positive for the midstream companies with existing pipelines in this part of the play that have the
potential for further expansion, in our view: BKEP, MMP, and PAA/PSXP. To note, we see limited need for
any additional takeaway capacity for pipelines servicing the rest of the Anadarko Basin as there is ample
capacity, in our view, and production from these plays is projected to decline.

Anadarko NGLs. NGL takeaway could become tight by the end of 2023. There is the potential for OKE to
further expand its Arbuckle II pipeline, which is currently under construction. The pipeline’s initial design
capacity is 400 MBbls/d, but it could be increased to 1,000 MBbls/d via pump additions, which would
provide Anadarko Basin producers sufficient runway to grow NGL production beyond 2023. Assuming a full
expansion to 1,000 MBbls/d, we see no need for any further NGL takeaway out of the basin for the
foreseeable future.

Anadarko Processing. While there appears to be sufficient processing capacity in the Anadarko Basin,
the SCOOP/STACK region could get tight as early as H1’20. Net-net, we project the need for 1.6 Bcf/d of
incremental processing capacity in the SCOOP/STACK (beyond what’s been announced). We believe this
bodes well for ENLK, ENBL, OKE and DCP.

Northeast Natural Gas. Production continues to trend higher than forecast, so supply/demand is tighter
than in our previous model. We now see utilization in the basin reaching 94% by 2023E (vs. 90%
previously). By 2023E, we forecast 41.3 Bcf/d of production, compared to 44.0 Bcf/d of takeaway (our
prior model projected 2023E production of 38.7 Bcf/d versus takeaway of 42.8 Bcf/d or excess capacity of
4.2 Bcf/d). Basis differentials for Northeast gas takeaway pipelines have narrowed, with 5.8 Bcf/d of
incremental capacity placed into service over the past 12 months, e.g., a trailing-12-month (TTM) average
of $0.54 vs. $0.93 based on 2017 prices. We forecast 4.3 Bcf/d and 5.0 Bcf/d of additional pipeline
capacity to enter service in H2’18E and 2019E, respectively, which should further improve pricing. Longer
term (2023), if Northeast gas takeaway tightens as we project, we believe the following three companies
should benefit the most: ENB, KMI, TRP, and WMB.

Wells Fargo Securities, LLC | 3

Midstream/MLPs / Natural Gas Equity Research

Northeast NGLs. Ethane. There’s currently not enough takeaway to support full ethane recovery in the
Marcellus/Utica. Once ME2/ME2X is completed and assuming these pipelines run at full design capacity,
there should be just enough capacity to support full ethane recovery. However, if ME2/ME2X do not run at
full design capacity (e.g., if some of the pipe is used to move refined products), more ethane takeaway
would be required to support full ethane extraction. Propane+. For propane+ (propane, normal butane,
iso-butane, and natural gasoline), takeaway capacity is currently very tight, resulting in continued NGL by
rail movements. Takeaway is projected to remain tight even as new identified projects are placed into
service (Mariner East 2/2X – at 50% utilization). However, if we assume ME2/2X runs at full capacity
(100% of capacity used for NGLs), we believe takeaway capacity for propane+ will be sufficient starting in
2020 (when ME 2X is completed).

Northeast Processing. We believe processing capacity in the Marcellus/Utica is currently constrained

and limiting growth of wet gas production in the Northeast. Net-net, we project the need for 4.0 Bcf/d of
incremental processing capacity (beyond what’s been announced), implying approximately $3B of new
investment opportunities. We believe this bodes well for MPLX, AM, and WMB.

Bakken Oil. Production is tracking ahead of our prior forecast. We now think the Bakken crude takeaway
could get tight by the end of 2018 (versus 2019, estimated in our previous analysis). This is a positive for
firms with crude pipelines in the region (EEP, ETP, KMI, PAA, and TGE) and potentially a positive for
companies with crude by rail assets in the Bakken (ANDX, CEQP, EEP, GLP, PAA, and PSXP). On the basis
of our revised model, we estimate the need for ~435 MBbls/d of incremental pipeline capacity by Q4’23E.

Bakken NGLs. Our outlook for Bakken NGLs remains unchanged. We project NGL takeaway (for
propane+) to be heavily constrained between now and the end of 2019, when OKE’s Elk Creek pipeline is
slated to come into service. NGL by rail shipments will likely fill the gap over the next few quarters. By
2020, we believe there will be ample NGL takeaway capacity in the Bakken primarily due to the start-up of
OKE’s large Elk Creek NGL pipeline. We do not foresee the need for any additional NGL pipelines in the
Bakken over the next 5 years once Elk Creek is in service.

Bakken Processing. We project processing capacity utilization in the Bakken of 80-90% over the next 5
years as capacity additions efficiently match production growth. In total, we calculate 5 new processing
plants are under construction, representing 0.9 Bcf/d of new processing capacity. We don’t see the need
for any additional processing plants beyond what’s already been announced, at least for the next five
years. That stated, production growth in the Bakken is accelerating at a rapid clip and we would not rule
out the possibility of additional processing capacity expansions if growth continues to exceed our
projections. We believe OKE would be the biggest beneficiary of tight processing capacity in the Bakken.

Niobrara Crude Oil. We forecast that crude takeaway capacity out of the Niobrara will become
constrained (i.e., utilization to exceed 90%) beginning in Q2’20E. To note, in our previous analysis (from
February 2018), we had estimated the region to be modestly overbuilt over the entire 5-year period
analyzed. The change from overbuilt to constrained is driven by a higher production forecast and the
partial conversion of White Cliffs to NGL service. This is a long-term potential positive for midstream
companies with pipeline assets in the region (MMP, NGL, SEMG, SEP, and TGE).

Niobrara NGLs. In our prior Basin Book update, we projected the need for around 200 MBbls/d of
additional NGL pipeline takeaway out of the DJ Basin. Since then, EPD announced it was moving forward
with the Front Range expansion (+100 MBbls/d) and SEMG announced it was converting a portion of its
White Cliffs pipeline to NGL service (+90 MBbls/d). Overall, we view Niobrara supply versus takeaway as
essentially balanced. We project the basin to become tight again beginning in Q4’22 and see the need for
just one more modest expansion (~25-50 MBbls/d).

Eagle Ford Crude Oil. Takeaway in South Texas could become tight by H2’21. While there are currently
no dedicated Eagle Ford pipelines planned or under construction, the EPIC pipeline (200 MBbls/d of
incremental capacity) is to have a receipt point in Gardendale, Texas (in the Eagle Ford). However, based
on our understanding, the vast majority of the throughput on this system is to come from the Permian.
Hence, it is excluded from our Eagle Ford analysis. To the extent that this pipeline receives Eagle Ford
volumes, the forecasted bottleneck could be alleviated.

4 | Wells Fargo Securities, LLC

The Basin Book: Supply Vs. Takeaway Equity Research

Western Canadian Crude Oil. Based on existing takeaway and projects that have received FID and
sufficient regulatory clearance (Line 3 Replacement and TMX), we forecast heavy crude pipeline takeaway
capacity out of Western Canada to be insufficient to accommodate growing heavy supply through 2023.
The magnitude of takeaway shortfall is around 500 MBbls/d. If Keystone XL is ultimately placed into
service, Western Canada should have sufficient heavy crude takeaway capacity through 2023, in our
view. On the light crude side, takeaway capacity continues to exceed supply. Tight takeaway out of
Western Canada is a positive for both ENB and TRP.

Cushing Crude Oil. Based on our projections for basin production and average pipeline utilization, we
estimate total volumes heading to Cushing would exceed outbound capacity by 2019. We estimate the
oversupply could reach ~410 MBbls/d by 2023E (existing pipelines + FID projects), all else being equal.
There are three potential takeaway projects (TRP’s MarketLink, EPD’s Seaway, and Diamond-to-Capline),
which if constructed would bring Cushing more closely into equilibrium (there would still be a modest
constraint of ~35 MBbls/d by 2023E, in our view).

Wells Fargo Securities, LLC | 5