Must-know: Atlas Pipeline's 1Q14 earnings analysis (Part 4 of 7)
Atlas Pipeline’s gas gathering and processing and natural gas liquid (or NGL) sales business in SouthOK consists of the Velma system and the Arkoma systems. The Velma gathering system encompasses the Golden Trend and the Woodford Shale areas of southern Oklahoma. The Arkoma gathering systems are located in the Woodford Shale in southern Oklahoma. XTO Energy Inc. (XTO), Marathon Oil Company, and Vanguard Natural Resources LLC. are the major producers in these regions.
To facilitate increased Woodford Shale production, Centrahoma (APL’s joint venture with MarkWest Energy) brought on line a new 200 million cubic feet per day cryogenic processing plant, known as the Stonewall plant. The plant is located near the Coalgate and Tupelo facilities of APL in Oklahoma. This would increase Tupelo’s original capacity to process 120 million cubic feet per day. The company expects to accelerate the time frame to add another 80 million cubic feet day capacity on this plant to accommodate higher production at the Woodford Shale, South Central Oklahoma Oil Province (or SCOOP), the Arkoma Basin, and the Ardmore Basin. The Stonewall plant will initially increase the SouthOK aggregate processing capacity to approximately 500 million cubic feet per day.
In addition, APL is also constructing a pipeline to connect the Velma and Arkoma portions of the SouthOK system for $80 million, which is expected to be complete in September of 2014. We note that the drilling activity around the Velma and Arkoma systems continues to press ahead. The incremental demand for processing capacity, particularly in the vicinity of the SCOOP (or South Central Oklahoma Oil Province), would facilitate the added capacity.
Going forward, the company expects to replace high pressure low margin gas with low pressure high margin gas. Pat McDonie, the president and chief operating officer of APL, commented in the earnings conference call of 1Q14, “If you will recall from the last earnings call we told you that we were losing a substantial package of high pressure low margin gas that we would overtime reprice with low pressure high margin gas. That is occurring as promised and we are significantly ahead of schedule in replacing those volumes because of the continued high level of drilling activity and successful resolve of all producers. Due to the retention of a portion of the high pressure gas on the system and the accelerated increase in low pressure receipts we continue to bypass approximately 20 million cubic feet a day. The bypass would be eliminated when the high pressure gas is fully removed from the system.”
APL’s WestOK gathering system is located in the north central Oklahoma and southern Kansas Anadarko Basin and has 5,700 miles of natural gas pipelines. In this region, the company primarily serves Chesapeake Energy Corporation and SandRidge Exploration and Production LLC. It also sells NGL production to ONEOK Partners (OKS).
Recently, many of the APL’s large customers are refocusing their drilling efforts on infill drilling in proven areas. This gives APL a competitive edge because it already has pipeline infrastructure placed in these regions. Going forward, this would reduce its capital costs, if the trend continues. However, ethane production in this region has decreased or stagnated due to the ethane pricing environment. The current environment isn’t favorable for the removal of ethane from the raw natural gas stream because the price of natural gas has increased more than ethane, which led to ethane rejection. Approximately 25% of APL’s currently available ethane is being produced on the WestOK system.
Atlas Pipeline Partners (APL) is a master limited partnership operating in the midstream energy space. APL’s general partner is owned by Atlas Energy L.P. (ATLS). APL is a component of Alerian MLP ETF (AMLP), MLP ETF (MLPA), and Global X MLP & Energy Infrastructure ETF (MLPX).
Browse this series on Market Realist:
- Part 1 - Must-know: Introduction to Atlas Pipeline Partners
- Part 2 - Must-know: Atlas Pipeline’s first quarter earnings analysis
- Part 3 - Why Atlas projects higher distribution and EBITDA for 2014
- Basic Materials Industry
- Investment & Company Information