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Morningstar | DCP's 2019 Outlook Looks Stronger as Frac Spreads Recover

DCP Midstream is well-positioned to benefit from the surge in U.S. natural gas liquids production and exports in the coming years. DCP, in our view, represents a leveraged bet on the growth prospects of U.S. NGLs, given its high financial leverage, volume-dependent asset base, and extensive marketing operations where it benefits from NGL differentials.The partnership's simplification transaction in 2017 created one of the largest gatherers and marketers of NGLs in the United States, with an asset base of gathering and processing assets across the Permian, Eagle Ford, Scoop/Stack, and DJ Basin. In turn, DCP has leveraged its asset base to make growth investments in pipelines, including the important Sand Hills project, which will take advantage of quickly growing Permian NGL production and the Permian Gulf Coast Express, which should capture growth opportunities in Permian gas. Further, the partnership's DCP 2.0 investment in technology has improved asset optimization, reliability, and real-time decision-making efforts. The example of increasing Sand Hill's capacity by 35 thousand barrels per day with no incremental capital investment (beyond those in technology) resonates.Despite the partnership's position in the Permian, where we expect significant growth amid attractive well economics, we actually think its DJ Basin assets are more attractive. The entity's 45% market share in G&P by our estimates as part of a midstream duopoly means competition for new investment opportunities is minimal as competitors would need to build both G&P assets and pipelines because of the ability for DCP to block connections, lowering returns. This environment has allowed DCP to pursue incremental investments in several underutilized pipelines (Southern Hills, Front Range, Texas Express) to take advantage of expected NGL growth in the basin. The opportunity is not only in the expansions totaling 220 mb/d, but also in addressing the existing underutilization of the combined pipelines totaling around 140 mb/d, providing the potential for substantial additional earnings. Another example would be the DJ Mewborn 3 plant, which reached full capacity witihin one month.