| Natural Gas Midstream |
Review of Natural Gas Midstream
At year-end 2007, we owned and operated natural gas midstream assets that included approximately 3,700 miles of natural gas gathering pipelines and three natural gas processing plants, which had 160 MMcfd of total capacity. At year-end 2007, our natural gas midstream operations included the Beaver / Spearman gathering and processing facilities in the panhandles of Texas and Oklahoma, the Crescent gathering and processing facilities in central Oklahoma, the Hamlin gathering and processing facilities in west-central Texas and the Arkoma gathering system in eastern Oklahoma. There are approximately 2,200 producing wells connected to our natural gas gathering pipelines, with the Beaver / Spearman and Crescent systems comprising the majority of the well-connects and processing capacity. During 2008, two new gas processing plants – the Spearman plant in the panhandle of Texas and the Crossroads plant in East Texas – with 140 MMcfd of capacity were brought on line as discussed below. Segment operating income was a record $48.9 million in 2007, 67 percent higher than $29.4 million in 2006, due primarily to higher processing margins in 2007. The 67 percent increase in operating income was primarily the result of high frac spreads during 2007 caused by higher NGL sale prices and lower natural gas purchase costs, along with an increase in system throughput volumes. The gross processing margin increased by 32 percent to $89.9 million, or $1.33 per Mcf, in 2007, from $68.1 million, or $1.10 per Mcf, in the prior year. Adjusted for the cash impact of derivatives, the gross processing margin was $76.7 million, or $1.13 per Mcf, in 2007, up 51 percent from $50.6 million, or $0.82 per Mcf, in the prior year. System throughput volumes at our gas processing plants and gathering systems increased nine percent to 67.8 Bcf, or approximately 186 MMcf per day, in 2007 from 62.0 Bcf, or approximately 170 MMcf per day, in the prior year. The increase in system throughput volumes was primarily due to our success in contracting and connecting new supply to our facilities. Much of this new gas is a result of continued successful development by the producers operating in the vicinity of our systems. We commenced our natural gas midstream operations through an acquisition in March 2005 and have continued to grow this segment through additional acquisitions and expansion projects. We also continue to explore potential operating synergies with PVA’s oil and gas exploration and production business, including marketing natural gas production and building a processing plant in east Texas. We continually seek new supplies of natural gas both to offset the natural declines in production from the wells currently connected to our systems and to increase system throughput volumes. New natural gas supplies are obtained for all of our systems by contracting for production from new wells, connecting new wells drilled on dedicated acreage and by contracting for natural gas that has been released from competitors’ systems. During 2007, we spent $38.7 million on expansion projects to allow us to capitalize on such opportunities. The expansion projects included two natural gas processing facilities with a combined 140 MMcfd of inlet gas capacity, which commenced operations during 2008. These two natural gas processing plants include the Crossroads plant in east Texas, with 80 MMcfd of capacity, which will process most of the liquids-rich Cotton Valley gas production for PVA, and the Spearman plant, with 60 MMcfd of capacity, which will process gas that currently is bypassing our largest plant (Beaver), which is at capacity. During 2007, PVR Midstream generated a majority of its gross margin from gas purchase / keep-whole (37 percent) and percentage-of-proceeds (34 percent) contractual arrangements, under which our gross margin is exposed to increases and decreases in the price of natural gas and natural gas liquids (NGLs). The remaining 29 percent of the gross margin was generated by system throughput volumes processed under fee-based gathering contracts. As a result, much of PVR Midstream’s profitability depends on the relationship between the price we receive for the NGLs we extract and sell at our processing plants and the price of natural gas we purchase from producers. The difference between these two prices, the fractionation or “frac” spread, can be volatile and difficult to predict. Therefore, we employ various commodity price derivatives to protect our margins. Organic Growth Due to high commodity prices and increased competition to purchase energy assets, acquisition costs have risen and corresponding acquisition rates of return have fallen over the past few years. In response, we and other PTPs have sought supplemental growth via “organic” or non-acquisition opportunities. Examples of this type of organic growth in midstream include successfully competing for increased well connects in producing areas with strong production growth, engaging in drop-down transactions involving assets sold by a parent or other affiliated entity, and constructing, rather than buying, new midstream assets. We have successfully engaged in these types of activities over the past two years in both the midstream segment (e.g., increased well-connects, construction of new processing plants) and the coal and natural resource management segment (e.g., coal infrastructure, oil and gas royalties). The goals of such organic growth efforts are to reduce the costs of overall growth and to thereby improve returns to unitholders relative to an “acquire-only” growth model. |
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Natural Gas Midstream Industry Overview
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