Adam Bedard, CEO ARB Midstream, LLC Midstream View on Rail June 2, 2015
ARB Midstream Overview Growth oriented, infrastructure development company focused on early stage, organic development projects Provide marketing and logistics services to producers and refiners Quantitative analytics drive development strategy Current Projects DJ Basin Energy Hub: Niobrara Connector ( NiCon ) Midland Basin (Big Spring) Energy Hub: Gateway Project 2
Projects Energy Rail Hubs Niobrara Connector Heart of DJ 225 Acres ISD: Q4 15 79,000 b/d Storage: 200 Mbbl Partnership with Hi-Crush (Sand In, Crude Out) Howard County 300 acres ISD: Q1 16 Pipe Con. Partnership with Hi-Crush (Sand In, Crude Out) Permian Gateway 3
Market Observations Uncertainty about future crude oil production adds substantial risk to new midstream projects Rail provides a Just-In-Time solution Flips from producer push to a refiner pull Compression of diffs is changing CBR movement patterns Rail and Pipe netbacks trending to parity Quality deducts, pipe specs drive value of segregation Pipe commitments have a 10x capital need from producers compared to rail 4
Uncertainty What is production going to do? It depends on flat price, reduced drilling costs, improved break evens, drilled uncompleted wells, drilling efficiencies, contracts, crude quality, CapEx, OPEC, etc., etc., etc.,
What will production do? Upside High grading Increased drilling efficiencies Improving Breakevens Decreased completion costs Rig rates have fallen 20-30% Improving price WTI has closed above $50 since Feb 3 Producers bringing rigs back Drilled Uncompleted (DUCs) Downside Flat price downside Declining rig count Drilled Uncompleted (DUCs) OPEC production Iran deal Iraq increasing exports 6
Williston Basin: Crude oil production forecast swings by 500,000 b/d over next 5 years depending on model assumptions 2,800,000 Williston Basin - Crude Oil Production Forecast 2,400,000 Crude Oil Production (b/d) 2,000,000 1,600,000 1,200,000 800,000 400,000 514,000 - Source: HPDI, ARB Midstream 7
Uncertainty in production is the difference in some pipes not being full 2,800,000 Williston Basin: Production and Takeaway Capacity Production and Takeaway Capacity (b/d) 2,400,000 2,000,000 1,600,000 1,200,000 800,000 400,000 - Rail ~640,000 b/d of new pipeline capacity announced start of 2017 Pipe Refinery Source: HPDI, ARB Midstream, Company Presentations 8
Pipelines out of the Williston have not been full. The stacked S/D chart is overly simply. Production & Takeaway Capacity (b/d) 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - Williston Basin: Pipeline Capacity and Flows Pipe Volumes Pipeline Capacity 9
DJ Basin: Crude oil production forecast swings by 180,000 b/d over next 5 years depending on model assumptions 800,000 DJ Basin Crude Oil Production Forecast Crude Oil Production (b/d) 700,000 600,000 500,000 400,000 300,000 200,000 100,000-180,000 Source: HPDI, ARB Midstream, Company Presentations 10
That production swing has huge impact on utilization of infrastructure DJ Basin: Production and Takeaway Capacity 800,000 Production and Takeaway Capacity (b/d) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 Producer Push Refiner Pull Rail Pipe - Refinery Source: HPDI, ARB Midstream, Company Presentations 11
Differentials Differentials are an incentive, and a risk, for CBR
Diffs in 2015YTD have come in drastically for WCS and Bakken, but have increased to the East and West Coasts over 2014 ANS WTI + $8.69 WTI + $4.66 WTI + $5.19 WCS Maya - $23.85 Maya - $11.94 Maya - $7.11 WTI 2013: $98.03 2014: $93.28 2015YTD: $51.09 Bakken@CLB WTI - $5.20 WTI -$6.05 WTI - $2.48 Brent WTI + $10.63 WTI + 6.39 WTI + 6.65 LLS WTI + $9.35 WTI + $3.62 WTI + $4.92 Source: Argus 2015YTD: Data through May 14, 2015 13
Rockies (P4) has ~ half of the loading capacity as Williston (P2). PADD 4 (700 Mbbl/d) PADD 2 (1.4 MMb/d) PADD 3 Source: Various Industry Sources 14
Volumes railed from PADD 4 to PADD 3 now exceed volumes from PADD 2 (Williston) to PADD 3 350,000 300,000 PADD to PADD Rail Movements Rail Movements (b/d) 250,000 200,000 150,000 100,000 50,000 - Source: EIA PADD 2 to PADD 3 (b/d) PADD 3 to PADD 3 (b/d) PADD 4 to PADD 3 (b/d) 15
Rail can compete with pipeline econs $15 Cost Includes Trucking, Transload, Rail Car Cost, Freight Rate, PLA, and FSC Market Rail Offers Better Netback West Coast If ANS-WTI > $3.50 +/- quality East Coast If Brent-WTI > $6 +/- quality Gulf Coast Parity +/- quality
Rail to West Coast can provide higher netbacks that pipe to Cushing, but diffs are converging $30 $25 Price Differentials ($/bbl) $20 $15 $10 $5 Rail Wins $- $(5) Source: Argus, ARB Midstream ANS-WTI 17
Forward Curve for ANS-WTI suggests $3.56/bbl, which is nearly parity between rail and pipe $6 ANS-WTI $5 Forward Curve ($/bbl) $4 $3 $2 $1 $- Source: Argus 18
Quality Rail enables refiners to pull the barrels they want
Most of DJ Production growth is API>40 300,000 DJ Basin Colorado - Production By API Crude Oil Production (b/d) 250,000 200,000 150,000 100,000 50,000 - Source: HPDI API<10 API<20 API<30 API<40 API<50 API<60 API<70 API>=70 20
Pipeline specs leave barrels in the market 35,000 30,000 PXP NIO Specs DJ Basin: Production By API White Cliffs Specs 25,000 Production (b/d) 20,000 15,000 10,000 5,000 0 Source: HPDI, FERC 21
Quality Matters: Deduct from posted price -$5 for 60 degree API in Cush Production (b/d) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 DJ Production By API & Gravity Deduct $- $(2) $(4) $(6) $(8) $(10) $(12) $(14) Discount from WTI ($/bbl) Source: HPDI, Various refiners 0 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 Prod By quality Deduct $(16) 22
Capital Requirement Producers are in capital conservation mode, and are less eager to make long term commitments
Pipe vs. Rail Rail Lower capital cost Fast to market (Site permitting, construction much faster) Scalable Neat barrel Shorter contracts (2-3 year commitments vs. 10 years for pipeline) Faster transit times which reduces inventory risk Access to coastal areas not connected via pipe O/D flexibility Can capitalize on arbitrage Longer-term opportunities Future exports of crude Public perception & Safety concerns Pipeline Longer lead time Higher capital cost Lower variable costs 24
Pipe vs. Rail Producers have to commit 10X Capital for Pipe $800,000,000 $700,000,000 $600,000,000 $500,000,000 Capital Cost Producer Commitment: Rail: $29,200,000 Pipe: $292,000,000 Cost of Fill: 13,540,000 Assumptions: $400,000,000 Pipeline Capacity: 100,000 b/d Pipeline Length: 550 miles $300,000,000 Pipeline Diameter: 20 Producer Throughput: 20,000 b/d $200,000,000 Oil Price: $60/bbl Term: $100,000,000 Rail: 2 Years Pipe: 10 Years $- Capital cost Tariff: Rail: $2/bbl Rail Pipeline Pipe: $4/bbl 25
Market Observations Uncertainty about future crude oil production adds substantial risk to new midstream projects Rail provides a Just-In-Time solution Flips from producer push to a refiner pull Compression of diffs is changing CBR movement patterns Rail and Pipe netbacks trending to parity Quality deducts, pipe specs drive value of segregation Pipe commitments have a 10x capital need from producers compared to rail 26
End Adam Bedard, CEO adam.bedard@arbmidstream.com