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OXY's Swing to the DJ Could Lift Western Midstream

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The Daley Note: October 31, 2022

Occidental (OXY) recently added new rigs to its drilling program in the Denver-Julesburg (DJ) Basin, an unexpected development that could lift our outlook for Western Midstream (WES). For most of 2022, OXY had operated 1 rig on its DJ acreage.

This rig has been feeding Western’s DJ gathering system, which has been struggling to grow volumes. On Sept. 17, OXY added a second rig in the DJ, according to East Daley's Midstream Activity Tracker, and on Oct. 20, a third rig. This follows the overall trend in the DJ, with total rigs in the eastern Colorado-Wyoming basin increasing from 14 at the beginning of 2022 to 19 today.

OXY.DJ Volumes2

East Daley hadn’t expected a significant ramp in OXY rigs in the DJ given the producer’s focus on the Permian. We use guidance from OXY and other operators to forecast rigs and supply in our asset-level Blueprint Financial Models. In its FY22 guidance, OXY guided to 2 total rigs outside its Permian program, split between the Powder River and DJ basins.

Based on a 1-rig program, East Daley models OXY's gas volumes to average 676 MMcf/d in 2022 on the WES - DJ system. Were OXY to run only 1 rig in 2023, volumes would decline to 593 MMcf/d. With a three-rig program, volumes in our forecast would average 647 MMcf/d in 2023.

With these new rigs, the total rig count monitored by our Midstream Activity Tracker on the WES - DJ system stands at 6. In our latest Blueprint Financial Model for WES, East Daley forecasts an average of 4.7 rigs in 2023, which would result in flat system production (see figure). Assuming 6 rigs, EBITDA on the WES – DJ system increases by ~$18 million in 2023 and $30 million in 2024. With midstream systems in the Permian that OXY feeds hitting constraints, the producer could focus more on the DJ and Rockies in 2023.  – Zack Van Everen Tickers: OXY, WES.

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East Daley has published a complete group of 3Q22 Earnings Previews and Blueprint Financial Models for midstream companies within our coverage. Quarterly Earnings Previews and Blueprints are now available for Antero Midstream (AM), Crestwood Equity (CEQP), Enbridge (ENB), EnLink Midstream (ENLC), Enterprise Products (EPD), Energy Transfer (ET), Equitrans Midstream (ETRN), Kinder Morgan (KMI), Kinetik Holdings (KNTK), Magellan Midstream (MMP), MPLX (MPLX), ONEOK (OKE), Plains All American (PAA), Summit Midstream (SMLP), Targa Resources (TRGP), TC Pipelines (TRP), Western Midstream (WES) and Williams (WMB).

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