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The Daley Note: March 9, 2023

East Daley currently forecasts 1.5 Bcf/d of dry gas production growth (+16%) from the Delaware sub-basin of the Permian in 2023. Some of this growth will come from surprising places, such as Delek Logistics Partners’ (DKL) 3Bear G&P system in Lea County, NM.

While Energy Information Administration (EIA) data shows gas production slowed in New Mexico from October to November 2022, we believe this pause to be more noise than signal. Indeed, gross natural gas production for New Mexico popped by 167 MMcf/d in December 2022 despite Winter Storm Elliott rolling through most of the Lower 48, including New Mexico and West Texas.

Several pockets of the Delaware are showing meaningful growth, including the 3Bear system (now called Delaware Gathering System, or DGS). In June 2022, DKL acquired privately backed 3Bear Delaware Holding for $628 million.

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As shown in the Energy Data Studio forecast for 3Bear’s Libby plant, natural gas volumes have increased steadily from 51 MMcf/d in June 2022 to 67 MMcf/d in 4Q22. Gas residue samples are up 25% so far in 1Q23 vs 4Q22, indicating continued throughput growth on the asset.

Operators near the 3Bear gathering system include Mewbourne Oil, Earthstone (ESTE), Permian Resources (PR) and ConocoPhillips (COP). Producers have been running 1-2 rigs in 2023 on the newly acquired 3Bear system. COP and PR are the active drillers we currently allocate to the system.

Based on a guided 2023 EBITDA multiple of 6.25x (on a transaction price of $628 million), we believe implied Y-o-Y growth in 2023 on the DKL system is well above our 16% growth for the Delaware Basin overall. Based on this growth, we anticipate DKL will hit gas processing capacity by YE23. – Yamah Nabiyar Tickers: COP, DKL, ESTE, PR.


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