Midstream 2014 Recap and 2015 Year Ahead January 9, 2015

Transcription

1 Midstream 2014 Recap and 2015 Year Ahead January 9, 2015 Becca Followill Senior Managing Director James Carreker, CFA Director Please see important disclosures beginning on page 55

2 Summary Starting the New Year, it s helpful to recap trends of the past year, what worked and didn t, and implications for the year ahead will be largely shaped by the commodity collapse at year-end The largest infrastructure boom in our lifetime stands to stub its collective toe and take a collective pause and depending on how prices shake out, could turn into a bust with some recently completed assets going idle. While the word Opportunity best described 2014 (excluding Q4 of course), the word Uncertainty we think best describes E&Ps are reworking budgets, MLPs are waiting on those outcomes, and no one has conviction on commodity prices. At the beginning of this piece we look back at the key themes of 14, discuss what we think will be hot (and not) in 15 and list some of the headwinds and tailwinds facing the group. We then break the piece down into six sections: Sector Performance, Commodity Pricing Commentary, Infrastructure Build, M&A, Capital Markets and Money Flows, and Valuation. Sector Performance The Alerian MLP index was relatively flat for 2014, with a -1% price change for the year. The index underperformed the S&P 500 by ~12% (S&P +11.4% in 14). After dividends, the AMZ underperformed the S&P 500 by 6.6%. Top 3 performing sectors were Refinery Logistics MLPs, Natural Gas MLPs and Diversified Midstream MLPs. Bottom 3 performing sectors were E&P MLPs, Agricultural Products MLPs and Oilfield Services MLPs. MLP IPOs in 14 were also relatively flat on the year with an average gain of 3%. Note that 11 of 20 names were negative on the year. Valuation Top Picks: Our top picks for 15 are CQP $31.18 Buy $41 PT, CQH $22.68 Buy $32 PT, EQM $82.33 Buy $107 PT, and EPD $34.44 $44 PT. With CQP and CQH, they have highly contracted cash flows with no commodity sensitivity and visibility to substantial distribution growth in 17 as LNG s projects are completed. EQM has double digit distribution growth for the next 5 years, minimal leverage, no commodity sensitivity and volumes largely gas pipeline driven. EPD is a solid standby, with thick coverage, the ability to grow their distribution in almost every scenario, and a cost of capital advantage by not having a general partner. 2

3 Summary (cont d) Commodity Pricing Commentary NGLs 2014 Biggest story of the year was collapse in NGL prices following the crude drop in Q4 14. NGL prices got an artificial boost in Q1 on cold weather and surging propane prices. But the propane shortage quickly turned into a glut just like the rest of the NGL barrel. And NGLs took another major leg down with oil in October. And the #2 story was ethane decoupling from methane beginning mid summer. Common view was that methane would provide a floor for ethane, as producers could keep ethane in the gas stream via ethane rejection, but recently ethane has traded to as low as 70% of its methane equivalent value. Despite the composite NGL barrel trading at its lowest levels since 2002 (currently 40c/gal even in Dec 08 with crude at $40/bbl NGLs traded only as low as 45c/gal), we are modestly bullish on NGL prices. While we see little upside to ethane, propane exports and a modest increase in crude prices should provide some relief: Ethane: Still capped at maximum of methane prices. At our $3.25/mcf gas price assumption, that s 21c/gal. We think ethane will trade below that given the incentive to realize higher propane prices and limits on ethane rejection due to gas pipeline BTU limitations. Propane: Export facilities provide near term uplift. With propane inventories at all-time highs and ~20 mmbbls over 5-year averages, the addition of SXL s Mariner East and Mariner South and EPD s Gulf Coast Expansion in early 15 should provide an additional 300 mbpd of export capacity to soak up a flooded local market. C4+: Higher crude price forecast should provide tailwind. Exacerbating the NGL barrel decline has been that in addition to lower crude prices, butanes and pentanes have also been trading lower on a relative basis butanes now at 53% of crude and pentane at 78% vs averages of 55% and 89%. Assuming the heavier portion of the barrel returns to historical trading averages on a relative basis and we see crude improve to $60/bbl in 15, we should see some improvement in C4+ pricing. For 15, we are assuming that NGLs trade at 55c/gal or ~38.5% of crude oil, about 35% above their current prices. 3

4 Summary (cont d) Commodity Pricing Commentary (cont d) Crude Oil Year-end Collapse: While 14 crude oil prices averaged $93/bbl, down only 5% from 13, prices have been in a freefall since early October to now sub $50/bbl. And the market moved from backwardated to contango in early October. U.S. oil production rose another 1.2 mbpd in 14, following a 1 mmbpd increase in 13 and reached its highest level in almost 30 years (Feb 86). Natural Gas Stellar start, dismal finish is the best way to describe 14, with weather the driver of both (1Q 10% colder than normal and 4Q 6% warmer than normal). Storage swung from being 55% below the 5-year average at the first of April to basically normal by the end of the year. Those massive injections helped support gas prices, until there was no more room left at the inn. Total production rose a whopping 7% or 5 bcf/d. For 15, although we have gas production growing by 4 bcf/d or +5%, we have the year-over-year rate of change slowing to 1% by March. USCA Price Deck: Our commodity price assumptions along 12-month strip pricing (as of ) are shown below. Our view is shaped by the following: USCA Commodity Price Assumptions Gas ($/mcf) Oil ($/bbl) NGLs ($/gal) Gas ($/mcf) Oil ($/bbl) NGLs ($/gal) USCA Assumptions $3.25 $60 $0.55 $3.75 $75 $ month strip $2.98 $52 $0.42 $3.35 $58 $0.45 Source: USCA, Bloomberg Oil: The pain OPEC (basically Saudi) is inflicting to curb the shale revolution and weaken Russia and Iran in particular is also straining OPEC country budgets (most budgets need >$90 oil). Yes, Saudi has $750B or two years of reserves, but we think there is a limit to how long they ll let this last. If the deficits starts to impact social programs, the risk of political instability rises materially. For the first time in an oil cycle, the primary marginal supplier of oil (U.S.) has a very steep decline curve (things will correct quicker). And, not much in the world is truly economic sub $60/bbl. NGLs: While we see an oversupply of ethane lasting at least several years, we think the additional ~250 mbpd of propane export capacity in Q1 15 and another 230 mbpd by Q4 15 will place upward pressure on propane prices. Gas: We are not too much above the current 15 gas strip of $2.98/mcf. At $3 gas in January, we think curtailments are likely, the pace of supply growth is likely to slow as rigs are dropped, and low prices should further stimulate demand. 4

5 Summary (cont d) Infrastructure Build 2014 Trends We tally almost $70B of projects announced during 14 a pretty staggering number. That includes only announcements from publicly traded companies for U.S. infrastructure projects >$100mm, where we can reasonably estimate costs (if not otherwise given) and where the project has a good likelihood of proceeding. Gas pipelines dominated the announcements, accounting for 53% of the potential capex spend, and the vast majority of that was for Appalachia take-away capacity. Implications for 2015 Midstream backlogs are chock full following the burst of activity in This is a year to digest and execute, particularly as we enter a major gas pipeline build cycle. Producer capex cuts have just now begun to trickle in, and E&Ps are only talking about 15 volumes right now, which are driven primarily by drilling that occurred in 14. The elephant in the room is what happens to 16 volumes following some meaningful drilling slowdowns in 15. For the Midstream guys, the ball is in the E&P s court, and they just have to wait for their next move. We think Midstream companies are doing some serious scrubbing of capex budgets how many fewer well connects, which projects can and need to be deferred, and how do they work with their E&P customers to help ease the pain? Bright Spots Four bright spots in an otherwise nasty commodity tape are the potential for much needed additional ethane export facilities; the likelihood of crude oil exports in 15 and the associated needed infrastructure; preliminary discussion of another major round of new ethylene crackers on the drawing boards for the end of this decade; and with gas prices at $3, higher gas demand and potential market-pull gas pipeline projects. M&A 2014 Trends Record year of M&A by a longshot, with $185B of transactions. Two deals dominate the numbers: KMI s $70B buy in of KMP, KMR and EPB, and the $37B WPZ/ACMP merger. Excluding those two mega deals, it was still a record year. 14 saw announcements to take out 9 publicly traded MLPs, up from 4 in 13. Most interesting deals by far were Kinder buy in of KMP, EPB and KMR and Targa buyout of APL and ATLS with both GPs capturing the LP depreciation tax shield. Implications for 2015 While we don t think we ll beat the record $185B of M&A in 14, we do think 15 will be another big year, with four key dynamics at play: Low commodity prices; the big guys are doing it; asset grab under way; and a highly fragmented sector. 5

6 Summary (cont d) Capital Markets & Money Flows 2014 Trends Most notable was that 14 saw the most capital markets activity ever, with $78B of debt and equity issued versus $68B in 13 and $66B in 12. IPO activity remained high, although slightly lower than the record 13. In 14, $7.7B was raised through 20 IPOs vs. $8.5B in 13 (21 IPOs). SHLX and AM led the charge with $1.1B and $1.2B raised, respectively, the largest MLPs IPOs to date. ATM programs continued to pick up steam with $5.6B raised through Q3 14, almost topping the $5.9B raised in all of 13. MLP industry (including pure GPs) closed 14 with 134 publicly traded companies with market cap of $633B. That s up from ~120 companies last year with a market cap of $590B and 36 companies ten years ago with market cap of $55B. Implications for 2015 Currently 15 S-1s pending for new MLPs, three times as many than this time last year, plus five more announced, but not yet filed MLPs. We are unsure when, if ever, the IRS will formally end their pause. And we are not sure if it really matters as they have begun PLRs for mainstream MLP assets, and the pause has done little to dampen a high level of activity in the space. 6

7 2014 Look Back 2014 What Was Hot Short Energy Condensate Exports Restructuring/Activists NGL Exports Ethane Rejection Crude Basis Narrowing New Appalachia Infrastructure Natural Gas Pipelines M&A Permian and Utica Basins U.S. LNG Contracts ATM Programs GP Multiples Yield vs. Growth Valuations Gulf Coast Water Access & Storage Energy Reform in Mexico What Was Not Crude Oil Prices Crude Oil Imports Vertical Integration NGL Prices Methane Floor for Ethane Appalachia Gas Basis Haynesville, Rockies and Other Dry Gas Natural Gas Storage Bargain Deals Mississippi Lime Canadian LNG Contracts Overnight Equity E&P MLPs and Royalty Trusts DCF Analysis Cushing OPEC Power 7

8 2015 Look Forward 2015 Likely Hot MLP M&A Midstream Project Deferrals E&Ps Outsourcing Midstream Infrastructure Private Equity/E&P Midstream Asset Sales More Ethane Rejection Ethane Export Plans Crude Oil Exports Gulf Coast Water Access Monster Utica Wells Rising Interest Rates Likely Not Raising Distribution Growth Guidance Major New U.S. Infrastructure Projects Rig Count Marginal MLP IPOs Ethane Prices Crude Oil Imports Anything marginal at $65 oil and $3 gas Credit Ratings 8

9 2015 Tailwinds and Headwinds Tailwinds Heading into 2015 Headwinds M&A Valuation Support Higher Cost of Equity Still Cheap Cost of Debt Rising Interest Rates Volume Growth on E&P's '14 Spend Lower '15 E&P Capex = Uncertainty for '16 Higher Refined Product Demand Global Growth Concerns Large Infrastructure Backlog Potential Project Deferrals Minimum Volume Commitments Higher Risk E&P Counterparties Lower Capex Falling Coverage Ratios Increased Propane Export Capacity Finite Market First LNG Exports (late '15) Massive Utica Wells Visibility of Future Petchem Expansions NGL Oversupply Crude Oil Export Approval Contango Crude Market Crude Oil Prices 9

10 Index Relative Performance Fed Funds Target Rate Rising Interest Rates Waiting Patiently For almost a year the Fed has been pointing towards mid- 15 as the most likely time to begin raising interest rates. The Fed has said they will wait patiently for the right time and do not expect to begin raising before April. Unemployment is down to 5.8%, third quarter GDP was revised upward to 5.0%, and inflation is in check all signs point to a 2015 raise. 45% 35% 25% 15% S&P and AMZ Performance in Rising Rate Environment 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Closest corollary we have to this is the period when a 1% Fed Funds rate was gradually increased by 25 bp increments to reach 5.25%. Over that two-year period the S&P 500 was stagnant for the first six months, but rose ~15% over the period. In contrast, MLPs rose 35% through the first 2% increase in the Fed Funds rate, but then fell 10% once the rate broached 3%. Bottom right chart shows historical 10-year yields and the correlation between AMZ performance and yields. Expectations are that higher yields would indicate poor AMZ performance; however, over the last 15 years, this correlation has only been negative for ~1/3 rd of the time. 5% -5% -15% Fed Funds Target Rate S&P 500 AMZ Index 2.5% 2.0% 1.5% 1.0% 0.5% Only noticeable correlation we ve been able to parse out during periods of rising rates is that large caps seem to underperform due to their liquidity. Implications for 2015 While we don t see a meaningful impact for the weighted average cost of debt in the space, a rising interest rate environment adds fuel to a fire already being fed by low commodity prices and an uncertain commodity price outlook. 10 In addition, rising interest rates could have a negative impact on fund flows, which provided nice industry tailwinds for the past three years. Source: USCA, Bloomberg

11 Sector Performance 11

12 The Alerian MLP index was relatively flat for 2014, with a -1% price change for the year. The index underperformed the S&P 500 by ~12% (S&P +11.4% in 14). After dividends, the AMZ underperformed the S&P 500 by 6.6%. In contrast to AMZ underperformance, Refinery Logistics and Natural Gas MLPs outperformed the S&P 500 by 18.2% and 2.6%, respectively. Top 3 performing sectors were Refinery Logistics MLPs, Natural Gas MLPs and Diversified Midstream MLPs. Bottom 3 performing sectors were E&P MLPs, Agricultural Products MLPs and Oilfield Services MLPs. Not shown to the right, but 14 MLP IPOs were relatively flat on the year with an average gain of 3%. Note that 11 of 20 names were negative on the year. Top 5 performing MLPs/GPs (price only) were: PSXP, TEP, MPLX, WGP and SUN, posting an average 64% gain. EQM made its third straight appearance in the top 10. Bottom 5 performing MLPs/GPs (price only) were: RNO, NKA, MCEP, NSLP, and LINE, posting an average 74% decline. No surprise that 8 out of bottom 10 performers were E&P MLPs. RNO (coal /mining) and EROC made their third straight appearance with LNCO repeating as well. Average year-end yield for the top ten in 14 was 3% vs. 20% for the bottom ten. Refinery Logistics MLPs MSCI US REIT Index Utility Index Natural Gas MLPs S&P 500 Index Diversified Midstream MLPs General Partners Refined Products MLPs Other MLPs Propane MLPs Yield Cos Alerian MLP Index Gathering & Processing MLPs Refiner MLPs Shipping MLPs Coal/Mining MLPs Oilfield Services MLPs Natural Gas Agricultural Products MLPs Crude Oil E&P MLPs PSXP TEP MPLX WGP SUN OILT EQM TCP EEQ CAPL -45.9% -52.7% -18.0% -19.2% -24.1% -24.3% -31.7% -37.6% 2014 Price Change -10.3% -0.4% -0.9% 14.0% 11.4% 6.9% 6.5% 5.9% 5.9% 2.9% 29.6% 25.3% 24.2% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% Best Performing MLPs in Price Change 40.9% 44.9% 47.1% 50.4% 50.1% 49.7% 52.4% 65.0% 71.9% 81.7% 25% 35% 45% 55% 65% 75% 85% RNO -80.2% NKA -79.9% MCEP NSLP LINE LNCO BBEP EROC LGCY LRE -72.4% Worst Performing MLPs in Price Change -69.2% -67.1% -66.3% -65.6% -63.0% -59.4% -58.5% -85% -75% -65% -55% -45% -35% -25% Source: Bloomberg, USCA, as of 12/31/14 12

13 MSCI US REIT Index Utilities Healthcare 23.3% 25.3% 24.3% Information Technology 18.2% Financials Consumer Staples S&P % 13.1% 12.9% Consumer Discretionary Industrials 8.0% 7.5% Materials 4.7% Alerian MLP Index Telecommunications -0.9% -1.9% Energy -10.0% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 13 Source: Bloomberg, USCA, as of 12/31/14

14 2014 MLP Price Returns 2014 MLP Price Returns 2014 MLP Price Returns PSXP TEP WGP MPLX EQM OILT TCP SUN EEQ ETE MMP EMES EEP CAPL SEP OCIR SRLP NSH TRGP RRMS CQH KMI VLP WES WMB WNRL SGU ETP NS TLLP ARLP FISH CQP SXL EPD BPL DKL APU SEMG ENLK WPT SE AHGP GMLP STON MWE SMLP PAA SXCP TGP ENLC ACMP FGP DMLP PAGP FUN GLP SPH NGLS OKE DPM HEP RGP NTI WPZ ARCX CLMT NGL HCLP GEL KNOP OXF TOO SXE APL BKEP ALDW OKS TLP CVRR CPLP TNH AMID CCLP QEPM EXLP DLNG MEMP BWP MEP ATLS MMLP CMLP USAC EVEP SPP RNF NMM UAN VNR OCIP CEQP ARP SDLP NRP LRE LGCY LINE LNCO EROC BBEP NSLP MCEP NKA RNO 0% 25% 50% 75% 100% -30% -20% -10% 0% 10% -100% -80% -60% -40% -20% 0% 14 Source: Bloomberg, USCA, as of 12/31/14

15 2014 MLP IPO Price Returns DM SHLX NEP WLKP VTTI GLOP CNNX AM HMLP RMP ENBL PBFX LMRK FELP USDP NAP CELP RIGP VNOM 15 JPEP Source: Bloomberg, USCA, as of 12/31/14-50% -25% 0% 25% 50% 75% 100%

16 Commodity Pricing Commentary 16

17 c/gal Biggest story of the year was collapse in NGL prices following the crude drop in Q4 14. NGL prices got an artificial boost in Q1 on cold weather and surging propane prices. But the propane shortage quickly turned into a glut just like the rest of the NGL barrel. And NGLs took another major leg down with oil in October Absolute and Relative Prices - C2+ Barrel 50% 45% 40% And the #2 story was ethane decoupling from methane beginning mid summer. Common view was that methane would provide a floor for ethane, as producers could keep ethane in the gas stream via ethane rejection, but recently ethane has traded to as low as 70% of its methane equivalent value Absolute Price (c/gal) Relative Price (% of WTI) 35% 30% 25% So what happened? Ethane and Natural Gas Prices ($/mmbtu) Gas production came in much higher than expected (+7% vs. our 2% assumption), and NGL yield finished in-line with expectations, up 7% to 1.6 GPM (ethane yield flat, C3+ yield up ~10%). $14 $12 $10 Petchem industry looks to average 1,025 mbpd of cracking in 14, 2% below our forecasted 1,050 mbpd, with Geismar not coming online mid-year as expected (~55 mbpd when online) $8 $6 $4 leaving 20 mbpd of excess ethane supply despite an estimated 350 mbpd of ethane rejection. $2 $- Ethane Methane Propane inventories, which began the year 15 mmbbls (28%) below the 5-yr avg. ended the year 21 mmbbls (35%) above the 5-year avg. And the heavier ends of the barrel (C4+) are down 47% since Oct. 1 with the 42% drop in crude oil prices. Result was basically flat NGL prices for the year, but a 35% decline from average Q1 prices to average Q4 prices. 17 Source: Bloomberg, EIA, USCA

18 Table to the right shows historical ethane supply and demand functions as well as our outlook. Despite the first ethane exports from the US in over 25 years and a ~30 mbpd increase in ethane cracking, our estimate of ethane rejection ballooned to ~350 mbpd in 14. And despite additional exports coming online over the next two years, we see ethane rejection increasing to ~600 mbpd by In 2017, US should have 4 world-scale crackers come online plus have a full year of EPD and Mariner East 2 ethane exports. Ethane rejection declines, but still remains significant at ~500 mbpd. Given large amount of ethane rejection, we re assuming that no matter the increase in ethane demand from cracker expansions/conversions and additional exports over the next three years, it will not be enough to move ethane prices above their methane equivalent. Additionally, given the significant oversupply we expect additional export announcements to be made in 15 (whether it s EPD, NGLS, American Ethane or someone else. For purposes of prognostication, we are estimating an increase of ~80 mbpd in ethane cracking during 15, ~25 mbpd in 16 and ~200 mbpd in 17, which should come from: WPZ s Geismar facility and expansion is scheduled to come online in early Jan and should add ~55 mbpd. Minor expansions and conversion amongst existing crackers that we believe will lead to modest ethane cracking increases of ~25 mbpd annually. Four new world scale crackers that should come online over the course of 2017 (~90 mbpd of ethane consumption each) which equates to two additional crackers on average over the year. USCA Ethane Supply/Demand Scenario Year Ending December 2011A 2012A 2013A 2014A 2015E 2016E 2017E Supply (mbbl/d) Potential Production 945 1,067 1,187 1,427 1,603 1,718 1,842 Est Ethane Rejection 0 (75) (210) (355) (403) (591) (498) Total Net Production ,072 1,200 1,127 1,344 Cracking Demand (mbbl/d) ,021 1,100 1,125 1,325 Ethane Exports Net (Draw)/Build (mbbl/d) (4) 34 (13) Inventories (mbbls) Beg of Year 24,323 22,892 35,396 30,818 37,902 38,500 39,375 Change in Inventory (1,431) 12,504 (4,578) 7, ,000 End of Year 22,892 35,396 30,818 37,902 38,500 39,375 46,375 Days of Supply Our forecast of future ethane exports above assumes exports from the following facilities: SXL s Mariner West Pipeline (50 mbpd) Q1 14 PBA s Vantage Pipeline (40 mbpd) Q2 14 SXL s Mariner East 1 and 2 (125 mbpd) Q2 15, Q4 16 EPD s Gulf Coast Facility (240 mbpd) Q3 16 Source: USCA, EIA 18

19 Table to the right shows historical propane supply and demand functions as well as our outlook saw a massive increase in propane production from gas plants (+137 mbpd, or 17% vs. 13) as US gas production was up 5 Bcf/d (!), and producers continued to drill richer gas, growing propane s GPM yield by 12%. Despite an unseasonably cold winter and record low inventories in the early months of the year, the increase in propane production steadily pushed up inventories to the point where they are once again at record highs. New export facilities should help soak up this excess near term as NGLS ~65 mbpd expansion came on in Q3 14, EPD will have a ~50 mbpd expansion on by Q1 15, by which time SXL should also have their ~200 mbpd facility up and running. Longer term however, we wonder if there will be enough propane supply to keep export facilities operating at high utilizations. Assuming new PDH plants get their fill of propane first, by 2017, we estimate that there will only be ~625 mbpd of propane available for export with ~1,250 mbpd of export capacity. Some of that excess capacity can be soaked up by butane exports, but we get that there will only be ~200 mbpd of excess butane in 17. In order to fill remaining capacity, we would need to see significant gas production growth that, in our view, cannot be supported with current commodity prices. USCA Propane Supply/Demand Scenario Year Ending October 2011A 2012A 2013A 2014A 2015E 2016E 2017E Supply (mbbl/d) Gas Plant Production ,075 1,153 1,236 Refinery Production Total Production 1,169 1,248 1,362 1,518 1,655 1,733 1,816 Demand (mbbl/d) Domestic Use 1,166 1,168 1,259 1,170 1,200 1,200 1,200 New PDH Facilities Gulf Coast Exports (and Mariner East) Other Exports Imports (117) (112) (126) (116) (110) (110) (110) Other (Balancing Element) 0 (4) (8) Total Demand 1,174 1,207 1,395 1,466 1,670 1,755 1,815 Net (Draw)/Build (mbbl/d) (5) 41 (33) 52 (15) (22) 1 Inventories (mbbls) Beg of Year (October) 61,412 59,720 74,639 62,526 81,409 75,934 67,904 Change in Inventory (1,692) 14,919 (12,113) 18,883 (5,475) (8,030) 365 End of Year (October) 59,720 74,639 62,526 81,409 75,934 67,904 68,269 Our 2017 export capacity estimate of ~1,250 mbpd consists only of projects we view as highly likely and does not include more speculative projects. Included in our estimate of capacity by 2017 are: EPD 533 mbpd NGLS 200 mbpd SXL 367 mbpd (Mariner South and Mariner East) PSX 150 mbpd Source: USCA, EIA 19

20 Propane Production (mbbl/d) Ethane Inventories (mbbls) Ethane Production (mbbl/d) Ethane Inventories (mbbls) NGL Data Points (October 14 data) 1,200 1,100 1, U.S. Monthly Ethane Production (mbbl/d) 45,000 40,000 35,000 30,000 25,000 U.S. Ethane/Ethylene Balances (mbbls) , , ,000 5-Year Range Year Avg Year Range Year Avg 1,100 U.S. Monthly Propane Production (mbbl/d) 90,000 U.S. Propane/Propylene Balances (mbbls) 1,000 80, ,000 60,000 50,000 40, , , , Year Range Year Avg Year Range Year Avg Source: EIA, USCA

21 Despite the composite NGL barrel trading at its lowest levels since 2002 (currently 40c/gal even in Dec 08 with crude at $40/bbl NGLs traded only as low as 45c/gal), we are modestly bullish on NGL prices. While we see little upside to ethane, propane exports and a modest increase in crude prices should provide some relief: Ethane: Still capped at maximum of methane prices. At our $3.25/mcf gas price assumption, that s 21c/gal. We think ethane will trade below that given the incentive to realize higher propane prices and limits on ethane rejection due to gas pipeline BTU limitations. Propane: Export facilities provide near term uplift. With propane inventories at all-time highs and ~20 mmbbls over 5-year averages, the addition of SXL s Mariner East and Mariner South and EPD s Gulf Coast Expansion in early 15 should provide an additional ~300 mbpd of export capacity to soak up a flooded local market. C4+: Higher crude price forecast should provide tailwind. Exacerbating the NGL barrel decline has been that in addition to lower crude prices, butanes and pentanes have also been trading lower on a relative basis butanes now at 53% of crude and pentane at 78% vs averages of 55% and 89%. Assuming the heavier portion of the barrel returns to historical trading averages on a relative basis and we see crude improve to ~$60/bbl in 15, we should see some improvement in C4+ pricing. For 15, we are assuming that NGLs trade at ~38.5% of crude oil or ~55c/gal, about 35% above their current prices. 21

22 $8 $6 $4 $2 $0 4,000 3,500 3,000 2,500 2,000 1,500 1, Henry Hub Spot Gas Price ($/mmbtu) 5 Year Range 5 Year Average Weekly Natural Gas Storage Levels (Bcf) 7 Year Range 5 Year Average Stellar start, dismal finish is the best way to describe 14, with weather the driver of both (1Q 10% colder than normal and 4Q 6% warmer than normal). Storage swung from being 55% below the 5-year average at the first of April to basically normal by the end of the year. Those massive injections helped support gas prices, until there was no more room left at the inn. Total production rose a whopping ~7% or 5 bcf/d, with some of the bigger gainers looking like this: Marcellus production +3.7 bcf/d, to 14.9 bcf/d; Utica production, while adding only 0.8 bcf/d, took off from a starting level of 0.2 bcf/d in Jan. 13 to an estimated 1.7 bcf/d in Dec. 14; Eagle Ford production +1.4 bcf/d, to 6.6 bcf/d; And Haynesville production -0.9 bcf/d to 6.8 bcf/d U.S. Gas Production (Bcf/d) 22 Source: EIA, Bloomberg, USCA

23 Spread to Prompt Month ($/bbl) Prompt Month Crude Price ($/bbl) Year-end Collapse: While 14 crude oil prices averaged $93/bbl, down only 5% from 13, prices have been in a freefall since early October to now sub $50/bbl. $15 $10 $5 Crude Oil Term Structure (WTI, $/bbl) 2nd Month vs Prompt 6th Month vs Prompt 12th Month vs Prompt 24th Month vs Prompt Prompt Month Price $120 $110 $100 Contango Market: Current forward NYMEX strips look like this: 15 - $52/bbl, 16 - $58 and 17 - $62. A dramatic change from a year ago at this time when the strips were $89, $84 and $81, respectively. And the market moved from backwardated to contango in early October. $- $(5) $(10) $(15) $(20) $(25) $90 $80 $70 $60 $50 Continued Domestic Oil Growth: U.S. oil production rose another 1.2 mbpd in 14, following a 1 mmbpd increase in 13. U.S. oil production reached its highest level in almost 30 years (Feb 86) and now consistently produces more crude than it imports. 2,000 1,800 1,600 Crude Production by Region (mbbl/d) Bakken Eagle Ford Niobrara Permian Permian Revival: A revival has been under way for a couple of years in the Permian, but accelerated in 14 as rigs transitioned to horizontal dominated. Permian production grew ~400 mbpd. For the Eagle Ford and Bakken, the pace of production growth was steady, +260 and +450 mbpd, respectively. Game of Chicken: Following a surge of production online in the last 6 months (U.S mbpd and Libya +200 mbpd, plus others), OPEC (Saudi) has dug in their heels and decided to see how much pain other countries can take before they start cutting investment and/or curtailing production. At sub-$60 oil, the pain is acute, and we are already seeing some drastic capex cuts out of the morelevered E&Ps. 1,400 1,200 1, Worldwide Crude Production (mmbbl/d) Saudi Arabia Russia USA China 23 Canada Source: EIA, Bloomberg, BP Statistical Review of World Energy 2013, USCA Rest of World

24 USCA Price Deck: Our commodity price assumptions along 12-month strip pricing (as of ) are shown below. Our view is shaped by the following: Gas ($/mcf) Oil ($/bbl) NGLs ($/gal) Gas ($/mcf) Oil ($/bbl) NGLs ($/gal) USCA Assumptions $3.25 $60 $0.55 $3.75 $75 $ month strip $2.98 $52 $0.42 $3.35 $58 $0.45 Source: USCA, Bloomberg (strip as of ) Oil: The pain OPEC (basically Saudi) is inflicting to curb the shale revolution and weaken Russia and Iran in particular is also straining OPEC country budgets (most budgets need >$90 oil). Yes, Saudi has $750B or two years of reserves, but we think there is a limit to how long they ll let this last. If the deficits start to impact social programs, the risk of political instability rises materially. For the first time in an oil cycle, the primary marginal supplier of oil (U.S.) has a very steep decline curve (things will correct quicker). And, not much in the world is truly economic sub $60/bbl. NGLs: While we see an oversupply of ethane lasting at least several years, we think the additional ~250 mbpd of propane export capacity in Q1 15 and another ~230 mbpd by Q4 15 will place upward pressure on propane prices. Gas: We are not too much above the current 15 gas strip of $2.98/mcf. At ~$3 gas in January, we think curtailments are likely, the pace of supply growth is likely to slow as rigs are dropped, and low prices should further stimulate demand. For the year, although we have gas production growing by 4 bcf/d or +5%, we have the year over year rate of change slowing to 1% by March. Producer Behavior is Cash-Flow Driven: It s not about the break-even price of a play, it s about how much cash does a producer can spend without incurring excessive leverage. As such, our E&P team put out a great analysis of rigs at risk of being dropped due to excess producer leverage. We are including it on the next few pages, first the big picture and then basin drill downs, as it s been a pretty good predictor so far of company announcements. Following that, we tabulate E&P capex cuts to date. 24

25 Our E&P team put this together early on in the oil price collapse and then refreshed it this week. It has proved so far to be a very good indicator of rigs at risk of being dropped as operators become strapped for cash. Note this only represents rigs for publicly traded companies. The color continuum represents the leverage profile of the E&P operator using consensus net debt to 15 EBITDA, with green being relatively lower leverage and red being higher leverage. Cut off for starting to color a rig red/higher risk was 2.5x net debt to 15 EBITDA. In addition to current debt, they layered on additional debt in 15 corresponding to the amount of cash flow outspend. 25 Source: Drilling Info., USCA

26 Bakken Operator Leverage Rigs EOX 4.6x 4 TPLM 3.9x 4 OAS 3.1x 17 QEP 2.5x 7 CLR 2.0x 20 NFX 2.0x 4 WLL 1.7x 17 SM 1.7x 6 EOG 0.7x 6 OXY 0.3x 6 DNR 0.0x 1 26 Source: Drilling Info., USCA

27 MidCon Operator Leverage Rigs SD 4.1x 34 MPO 3.9x 7 PQ 3.0x 2 RRC 2.7x 2 CHK 2.6x 21 GST 2.6x 1 UNT 2.1x 7 CLR 2.0x 26 NFX 2.0x 11 APA 1.6x 11 XEC 1.3x 6 DVN 1.1x 7 EOG 0.7x 2 27 Source: Drilling Info., USCA

28 Eagle Ford Operator Leverage Rigs HK 4.7x 4 CRK 4.4x 3 XCO 4.4x 3 SFY 4.1x 2 ROSE 3.7x 2 EPE 2.8x 5 CHK 2.6x 20 CRZO 2.6x 4 PVA 2.5x 7 SM 1.7x 4 APA 1.6x 12 PXD 1.2x 6 DVN 1.1x 3 APC 0.9x 8 COG 0.9x 4 EOG 0.7x Source: Drilling Info., USCA

29 Permian Operator Leverage Rigs REN 5.7x 1 ROSE 3.7x 5 LPI 3.3x 8 EPE 2.8x 4 WTI 2.7x 3 CHK 2.6x 1 RSPP 2.5x 7 QEP 2.5x 5 EQT 2.4x 1 AREX 2.3x 3 PE 2.2x 5 CXO 2.1x 36 SM 1.7x 1 WLL 1.7x 1 APA 1.6x 34 FANG 1.5x 5 XEC 1.3x 17 EGN 1.3x 13 PXD 1.2x 27 DVN 1.1x 19 APC 0.9x 10 EOG 0.7x 8 OXY 0.3x Source: Drilling Info., USCA

30 Appalachia Operator Leverage Rigs REXX 3.9x 3 AR 3.7x 14 RICE 3.6x 4 RRC 2.7x 9 CHK 2.6x 12 CRZO 2.6x 1 GST 2.6x 1 EQT 2.4x 11 SGY 2.4x 1 AREX 2.3x 2 SWN 2.1x 3 ECR 2.1x 2 GPOR 1.9x 6 NBL 1.5x 6 COG 0.9x 6 APC 0.9x 1 30 Source: Drilling Info., USCA

31 Capex ($mm) Rig Count Oil Production (mboepd) Ticker Basin '14 '15 Estimate Guidance % Change '14 '15 % Change '14 Consensus '15 Guidance % Change Estimated Midstream Provider(s) SN Eagle Ford $870 $625-28% % % KMI, EPD, RGP, DPM, ETP, ENLK MTDR Permian/Eagle Ford $570 $350-39% % % DCP Midstream, NGLS CXO Permian $2,600 $2,000-23% % % DCP Midstream, NGLS BBEP Permian/Mid-Con $375 $200-47% na na na % West Texas Gas (private) LINE California/Green River/E. TX $1,550 $730-53% na na na % WPZ, EPD, TLLP AMZG Bakken $115 $5-96% % 2.1 na na CLR Bakken / SCOOP $4,550 $2,700-41% % % OKS, DCP Midstream LLC, APL, ENBL REXX Marcellus/Utica $358 $200-44% 3 na na na na na MWE CRK Eagle Ford/TMS/Haynesville $580 $307-47% % % EPD, PAA, KMI, MMP, RGP, SXE MRO Global $5,500 $4,400-20% na na na na na na ROSE Permian / Eagle Ford $1,200 $750-38% % % RGP, ETP, KMI, PAA AREX Permian $400 $180-55% % % LPI Permian $1,100 $525-52% % % APL, NGLS, ENLK, DCP Midstream LLC ECA** Eagle Ford/Permian $2,550 $2,800 10% % % ETP, EPD, DCP Midstream LLC AXAS TMS $190 $54-72% na 1 na % EOX Bakken $250 $72-71% % % OKS Chaparral* Mid-Con $671 $336-50% % % APL, DCP Midstream LLC OAS Bakken $1,425 $800-44% % % Oasis Midstream GDP TMS $350 $175-50% % % PDCE Niobrara/Utica $637 $557-13% % % DPM COP Global $16,875 $13,500-20% na na na na na na Total - $42,716 $31,265-27% % % *Indicates Company Guidance and numbers are BOE (including natural gas) **2014 consensus adjusted upwards to gross up for full year of ATHL and FCA acquisitions Above we tabulate the handful of capex cuts to date. So far, a 41% drop in planned rig count for 15 vs. 14, but production is till projected to grow by 11%. Expect a lot more over the next two months as companies roll out 15 plans with Q4 earnings. And we will continue to update this as the cuts roll in. Source: Company reports, USCA 31

32 Infrastructure Build 32

33 The Numbers Below is a quick summary of the significant announcements we have tracked throughout 2014, with several caveats. These only reflect announcements from publicly traded companies for U.S. infrastructure projects >$100mm, where we can reasonably estimate costs (if not otherwise given) and where the project has a good likelihood of proceeding. In all, we tally 85 projects totaling almost $70B announced during 14 a pretty staggering number. Project Announcements By Project Type Project Type Cost ($mm) Gas pipeline $35,825 Crude oil pipeline 13,200 Gas processing 5,900 NGL pipeline 4,650 LPG exports 2,640 Fractionator 2,505 Refined products pipeline 1,150 Condensate 1,015 Crude logistics 730 Grand Total $67,615 Project Announcements By Basin Basin Cost ($mm) Basin Cost ($mm) Appalachia $33,885 To Mexico 940 Demand Centers 8,450 Utica 750 Bakken 6,480 LNG 700 Gulf Coast 4,940 SCOOP 620 DJ Basin 4,530 Eagle Ford 600 Permian 3,960 W. Coast 500 ArkLaTex 1,260 Grand Total $67,615 Gas Pipelines Dominate : More on that over the next few pages, but gas pipelines dominated the announcements, accounting for 53% of the potential capex spend. So Goes Appalachia: The bulk of the gas pipeline spend is to alleviate Appalachia bottlenecks, so that basin takes the lion s share of future capex. What s Not Here Noticeably absent are a couple of projects which did not happen in Both the proposed raw NGL pipelines from Appalachia to the Gulf Coast failed to launch, and instead were replaced by SXL s planned $2.5B Mariner East pipeline to the east coast. Not terribly surprising, but Keystone XL again failed to obtain regulatory approvals needed to move forward. 33 Source: USCA, Company reports

34 2014 was the year when we hit the tipping point, where NE supply exceeded demand on an average daily basis and boy did it ever show up in basis differentials. Over the past 24 months, Appalachia production has grown by 8.5 bcf/d, overwhelming a pipeline system designed for entirely different flows. Pipelines had been cautioning that this would happen and that they needed several years of lead time along with firm contract commitments in order to ensure adequate take away capacity. But few producers were willing to make those longterm commitments. Everything changed with this winter s basis blowout. Producers had pen in hand, willing to sign up for whatever was available, and pipelines scrambled to accommodate them announcing project after project to reverse flow to the west and south. The next wave, still under the contracting phase, are NE demand-driven projects to serve incremental NE load $2.00 $1.00 $- $(1.00) NE Natural Gas Supply and Demand (Bcf/d) Total NE Demand Total NE Demand - TTM Average Marcellus/Utica Production Appalachia Gas Pricing Basis to Henry Hub ($/mmbtu) Columbia Gas - Appalachia Leidy Hub Dominion South TGP Zone 4 $(2.00) $(3.00) $(4.00) $(5.00) $(6.00) 34 Source: EIA, Bloomberg, USCA

35 NE Marcellus Added Takeaway Company Project Name Pipeline Cost ($mm) Capacity In- Firm/ (mmcf/d) Service Proposed WPZ NE Connector Transco $ Nov. '14 Firm NI East Side Expansion Columbia Gas $ Q3'15 Firm NFG Northern Access 2015 NFG Supply $ Nov '15 Firm WPZ Leidy Southeast Transco $ Late '15 Firm WPZ/COG/PNY/WGL Constitution Pipeline Constitution Pipeline $ Q1'16 Firm NFG Northern Access 2016 NFG Supply $ Late '16 Firm WPZ Atlantic Sunrise Transco $2,100 1,700 2H'17 Firm GAS/NJR/SJI/UGI/SEP PennEast Pipeline PennEast Pipeline $1,000 1,000 Q4'17 Firm WPZ Diamond East Transco $650 1,000 Q3'18 Proposed Total $5,842 5,775 SW Marcellus/Utica Added Takeaway Company Project Name Pipeline Cost ($mm) Capacity In- Firm/ (mmcf/d) Service Proposed KMP Utica Backhaul Tennessee Gas $ Apr '14 Firm TEP GP Seneca Lateral Phase I Rockies Express $ Jun '14 Firm NI West Side Expansion Columbia Gas & Columbia Gulf $ Nov '14 Firm SEP TEAM-South Texas Eastern $ Nov '14 Firm SEP TEAM 2014 Texas Eastern $ H'14 Firm TEP GP Seneca Lateral Phase II Rockies Express $ Q4'14 Firm TEP GP REX Reversal Phase I Rockies Express $500 1, Firm SEP Uniontown to Gas City Texas Eastern $ Nov '15 Firm KMP Broad Run Flexibility Tennessee Gas $ Nov '15 Firm SEP OPEN Texas Eastern $ Q4'15 Firm TEP GP REX Reversal Phase II* Rockies Express $2,000 1,200 '16-'17 Proposed SEP Gulf Markets Expansion Texas Eastern $ Nov '16 Firm NI Leach Xpress Columbia Gas $1,420 1,000 Nov '16 Firm NI Utica Access Columbia Gas $ Q4'16 Firm ETP ET Rover ET Rover $4,100 3,250 Q4'16 Firm DTE/ENB/SEP NEXUS Gas Transmission NEXUS Gas Transmission $3,000 2, Firm TRP ANR East ANR Pipeline $3,000 1,200 Q3'17 Proposed SEP Access South Texas Eastern $ H2'17 Firm SEP Adair Southwest Texas Eastern $ H2'17 Firm KMP Broad Run Expansion Tennessee Gas $ Nov '17 Firm EQT/EQM/NEE Mountain Valley Pipeline* Equitrans $3,500 2,000 Q4'18 Firm NI WB Xpress* Columbia Gas $870 1,300 Q4'18 Firm D/DUK/PNY/GAS Atlantic Coast Dominion $4,750 1,500 Q4'18 Firm WPZ Western Marcellus* Transco $3,000 1,500 Q4'18 Proposed NI Mountaineer Xpress* Columbia Gas $1, Q4'18 Proposed Total $30,200 22,555 *Estimate as open season under way; actual amount could vary Bold, italic represents USCA estimates of project cost Tables to the left detail pipeline projects to take gas out of SW and NE Appalachia, including projects which came online during 14. Note that these include only those projects that originate within and terminate outside production areas. When we published our Appalachia infrastructure piece in late April 14, projects to move gas out of SW PA totaled ~15 bcf/d with ~$8B of investment. In the course of four months, that number ballooned to projects totaling ~28 bcf/d with ~$36B of investment. Note that we are just now really entering the major build cycle for these projects as 77% are scheduled to come online post As is frequently the case in infrastructure, we think it s very likely that the region becomes overpiped. Source: Company reports, USCA 35

36 Major Proposed U.S. LNG Export Facilities LNG Facility Ownership Potential Export Potential First Contracted? Volumes (Bcf/d) In-Service FERC Status Sabine Pass (T1-4) CQP 2.8 Yes 2015 Approved Cove Point D 0.8 Yes 2017 Approved Southern LNG KMI/RDS 0.4 Yes 2017 Filed Cameron SRE 1.7 Yes 2018 Approved Freeport LNG COP (50%) 1.8 Yes 2018 Approved Jordan Cove VSN 0.8 No 2018 Draft EIS Corpus Christi (T1-2) LNG 1.3 Yes 2018 Final EIS Golden Pass XOM/Qatar 2.2 Yes 2018 Filed Sabine Pass (T5) CQP 0.6 Yes 2018 Final EIS Magnolia LNG LNG.AU/Stonepeak 1.1 No 2018 Filed Lake Charles LNG ETE/BG 2.0 Yes 2019 Filed Sabine Pass (T6) CQP 0.6 No 2019 Final EIS Corpus Christi (T3) LNG 0.7 Partial 2019 Final EIS Gulf LNG KMI (50%)/GE (46%) 1.5 No 2019 Pre-Filed Oregon LNG Private 1.3 No 2019 Filed Excelerate Energy Private 1.4 No na Filed / Rescinded Total/Contracted Total Biggest news on the LNG front this year was DOE s decision to remove their orderof-precedence approval process. Beginning in August 14, LNG export facilities were able to receive final DOE approval as soon as they have completed the more rigorous and time consuming FERC process. Three facilities received final DOE approval to begin LNG exports in 14: Cameron, Cove Point, and Freeport and all have indicated that they have begun construction activities. Biggest question on LNG going forward is no longer regulatory based, but rather economics based with world-wide LNG generally priced as a percent of crude and crude prices sub $50/bbl, does anyone want to sign up for long-term capacity? 36 Source: DOE, Company reports, USCA

37 Perhaps lost in the frenzy of midstream activity has been a quiet but steady increase in U.S. gas exports to Mexico. Volumes are now running ~2.2 bcf/d, up from ~1 bcf/d at beginning of Beyond the current volumes, a significant amount of infrastructure is being built to increase export capacity to Mexico by at least 5.8 bcf/d by 17. Adding in OKS open season under way for mmcf/d could take that total to ~6.4 bcf/d. Included in that total are three projects with total capacity of ~2.4 bcf/d that came online in Q4 14, plus another 500 mmcf/d project that is scheduled to come online this month. Also included are two U.S.-to-Mexico gas pipeline projects with total capacity of ~2.8 bcf/d ( 17 inservice) which the CFE is scheduled to award over the next couple of months. Company: KMI Capacity: 200 mmcf/d In-Service: Nov 14 2,500 2,000 1,500 1, AZ NM OK Tucson Company: TBD* Capacity: 1.5 Bcf/d In-Service: Jan 17 Company: OKS Capacity: ~550 mmcf/d In-Service: n/a Mexico * Project to be awarded by CFE during Q1 15. U.S. Gas Exports to Mexico (mmcf/d) Waha Hub Company: NET Midstream Capacity: 2.1 Bcf/d In-Service: Dec 14 Company: ETP Capacity: 130 mmcf/d In-Service: Dec 14 Company: TBD* Capacity: 1.4 Bcf/d In-Service: March 17 TX Agua Dulce Hub Edinburg Company: KMI Capacity: 500 mmcf/d In-Service: Jan Source: EIA, Company reports, USCA

38 Plenty of Backlog: Midstream backlogs are chock full following the burst of activity in This is a year to digest and execute, particularly as we enter a major gas pipeline build cycle. Deferrals Likely: Producer capex cuts have just now begun to trickle in, and E&Ps are only talking about 15 volumes right now, which are driven primarily by drilling that occurred in 14. The elephant in the room is what happens to 16 volumes following some meaningful drilling slowdowns in 15. For the Midstream guys, the ball is in the E&P s court, and they just have to wait for their next move. We think Midstream companies are doing some serious scrubbing of capex budgets how many fewer well connects, which projects can and need to be deferred, and how do they work with their E&P customers to help ease the pain? Bright Spots: Four bright spots in an otherwise nasty commodity tape are: Potential for much needed additional ethane export facilities; Likelihood of crude oil exports in 15 and the associated needed infrastructure; Preliminary discussion of another major round of new ethylene crackers on the drawing boards for the end of this decade; and With gas prices at $3, higher gas demand and potential market-pull gas pipeline projects. 38

39 Midstream M&A 39

40 Table to right highlights some of the more notable midstream M&A during 14 and categorizes some of the themes. Record year of M&A by a longshot, with $185B of transactions. Two deals dominate the numbers: KMI s $70B buy in of KMP, KMR and EPB, and the $37B WPZ/ACMP merger. Excluding those two mega deals, it was still a record year. 14 saw announcements to take out 9 publicly traded MLPs, up from 4 in 13. For the first time in a while, M&A for individual assets was more active than for dropdowns. Most interesting deals by far were Kinder buy in of KMP, EPB and KMR and Targa buyout of APL and ATLS with both GPs capturing the LP depreciation tax shield. Significant 2014 Midstream Energy Deals Acquirer Seller Asset Value($mm) Public Company Acquisitions KMI KMP, EPB and KMR Entire Company $70,000 ACMP WPZ Entire Company $37,000 TRGP/NGLS APL and ATLS LP and GP interests in APL $7,700 EPD OILT LP and GP interests in OILT $6,038 BBEP QRE Entire Company $3,000 Koch Industries PDH Entire Company $2,100 ETP SUSS Entire Company $1,800 Asset Acquisitions WMB GIP II 50% interest in ACMP GP and 55mm ACMP LP units $6,000 MPC HES Retail gasoline network $2,874 TLLP QEP QEP Field Services $2,500 LINN DVN 900k net acres in Rockies, Mid-Con, E. & S. TX and N. LA $2,300 Enervest LINN Position in Granite Wash and Cleveland plays $1,950 WES Nuevo Energy Permian gas plant and gathering $1,500 VSN GIP II 50% stake in Ruby Pipeline $1,430 PAA OXY 50% interest in BridgeTex Pipeline $1,075 MEMP Undisclosed Producing oil fields in WY $935 BPL Trafigura AG Corpus Christi complex and Eagle Ford gathering $860 GIP Hastings Funds 25% stake in Freeport LNG $850 OKS CVX 80% of W. TX LPG and 100% of Mesquite Pipelines $800 Major Dropdowns/Intracompany Sales ETE ETP 40% interest in SXL IDRs $3,750 EPB KMI 50% of Gulf LNG and Ruby, 47.5% of Young Storage $2,000 ENF ENB Natural gas and diluent pipeline interests $1,760 WPZ WMB WMB Canadian Assets $1,200 DPM DCP Midstream 1/3 of Sand Hills & Southern Hills, Eagle Ford Assets, DJ Plant $1,150 EQM EQT Jupiter Gathering system $1,121 EEP ENB 66.7% interest in Alberta Clipper $1, Source: Company reports, USCA

41 Another Big Year Ahead While we don t think we beat the record $185B of M&A in 14, we do think 15 will be another big year, with four key dynamics at play: Low Commodity Prices: Instead of the rising tide lifts all boats environment we had been in until recently, this much lower commodity price environment has really bifurcated yields. A year ago at this time, only 6 of the stocks were yielding >10%. Now, almost a third are pushing or >10% yields (8 are >20%), while another one third are sub 5%. That s where opportunities are made. The Big Guys are Doing It: Kinder and Energy Transfer have put their stakes in the ground, and we don t think they will disappoint in 15. PAA has been predicting this pullback for couple of years and is poised to pounce on some opportunities. Asset Grab Under Way: We are now in the 9 th year of the U.S. infrastructure boom. Backlogs are still robust, but the big shale plays have been found. So we see strategic buying in order to access specific basins and/or shore up positions in existing basins. Fragmented Sector: At year end, there were 134 MLPs and pure GPs, up from 60 in 06, with a current collective market cap of almost $650B, up from $110B in 06. With so many IPOs over the last ten years, the space is dominated by primarily illiquid small-caps. Of the 134 names, only 18 (13%) have a market caps >$10B. One-third of the stocks have sub $1B market caps, and two-thirds sub $3B. That s a space ripe for consolidation. 41

42 Capital Markets 42

43 Midstream Capital Markets Action Continues Amazing statistics for Midstream capital markets continued in 2014 (see next few pages for charts): Most notable was that 14 saw the most capital markets activity ever, with $78B of debt and equity issued versus $68B in 13 and $66B in 12. IPO activity remained high, although slightly lower than the record 13. In 14, $7.7B was raised through 20 IPOs versus $8.5B in 13 (21 IPOs). SHLX and AM led the charge with $1.1B and $1.2B raised, respectively, the largest MLP IPOs to date. Total of $38B in equity raised in 14 through follow-ons, private placements, IPOs and ATM programs (ATMs through Q3 14). Excluding ATM programs, there were 88 equity offerings in 14 with an average deal size of $370mm. ATM programs continued to pick up steam with $5.6B raised through Q3 14, almost topping the $5.9B raised in all of 13. There are currently $16B of ATM program authorized for 36 companies, which compares with $11B and 29 companies at the end of 13. This includes KMI s recently announced $5B ATM program. Debt markets remained hot with $40B of debt issued in 14 compared with $34B in 13. MLP industry (including pure GPs) closed 14 with 134 publicly traded companies with market cap of $633B. That s up from 120 companies last year with a market cap of $590B and 36 companies ten years ago with market cap of $55B. More to come: Currently 15 S-1s pending for new MLPs, three times as many than this time last year, and another five companies have publicly announced plans for additional MLP IPOs. We are unsure when, if ever, the IRS will formally end their pause. And we are not sure if it really matters as they have begun PLRs for mainstream MLP assets, and the pause has done little to dampen a high level of activity in the space. Investor appetite for sector, strong for year, but fading at year end: Market cap of MLP and partial MLP products (OEFs, CEFs, ETFs and ETNs) grew 35% in 14, to $75B. 43 Industry funded 8 new products in 14. With most closed-end funds trading at a discount to NAV, it could be more difficult to raise money in the space for those types of funds.

44 MLP Money Flows Steep End of Year Decline Record year 2014 saw a record $21B raised for the space through closed-end funds, open-end funds, ETFs and ETNs. but the year ended in a whimper, with only $521mm raised in the month, the lowest amount since December Open-end funds dominated, accounting for 62% of the funds raised, or $12.8B. And closed-end funds faded, with only $3.1B raised compared with $4.9B in 13 and $3.4B each in 12 and Source: Bloomberg, USCA

45 MLP Initial Public Offering Activity MLP Legend Midstream GP Upstream Other Potential MLP IPOs Company Industry Company Industry Maxum Energy Logistics Refined Products Enviva Partners Other PES Logistics Partners Other Terryville Mineral & Royalty Partners E&P Hess Midstream Partners G&P Azure Midstream Partners G&P Mammoth Energy Partners Oilfield Services Smart Sand Partners Oilfield Services Exmar Energy Partners Other Sol-Wind Renewable Power Other Columbia Pipeline Partners Natural Gas ET LNG MLP Other PennTex Midstream Partners G&P Eureka Hunter MLP G&P Coastamare Partners Shipping Noble Corp MLP Oilfield Services Ocean Rig Partners Oilfield Services Consol Energy MLP Coal Midcon Midstream Oilfield Services EQT MLP GP Shipping Coal Propane 45 Source: Bloomberg, Company Reports, USCA