DCP Midstream (DCP) has the second-highest correlation with crude oil, after EnLink Midstream (ENLC). The one-year correlation between DCP and crude oil was 0.51 on October 6, 2017. DCP Midstream’s high correlation with crude oil reflects its high direct commodity price exposure, mainly through its natural gas processing and NGL (natural gas liquid) business. The partnership is one of the largest US natural gas processors and NGL producers. It had natural gas processing capacity of 7.8 bcfpd (billion cubic feet per day) on June 30, 2017.
Moreover, DCP Midstream’s correlation with crude oil is higher than its historical average, possibly due to lower commodity hedges. The partnership expects 22% of its 2017 gross margin to be linked to commodity prices, 18% of it to be commodity hedged, and 60% to be from fee-based sources.
Impact of crude oil volatility on DCP’s 2017 guidance
Due to a lower commodity price outlook, DCP Midstream expects its 2017 EBITDA (earnings before interest, tax, depreciation, and amortization) and DCF (distributable cash flow) to be lower than the midpoint of its guidance of $940 million–$1.1 billion and $545 million–$670 million, respectively. DCP’s commodity price expectations for 2017 are as follows:
- NGLs: $0.50–$0.65 per gallon
- crude oil: $50–$60 per barrel
- natural gas: $3–$3.50 per MMBtu (million British thermal units)
The partnership’s recent commodity price outlook expects average crude oil, NGL, and natural gas prices of $49.71 per barrel, $0.59 per gallon, and $3.10 per MMBtu, respectively, in 2017.
DCP expects a $0.01 per gallon change in NGL prices, a $0.10 per MMBtu change in natural gas prices, and a $1 per barrel change in crude oil prices to affect its earnings by $5 million, $7 million, and $4 million, respectively.
How DCP plans to reduce commodity exposure
DCP expects to lower its commodity price exposure through the expansion of its NGL and natural gas logistics business. DCP plans to spend over 50% of its total project backlog ($1.5 billion–$2.0 billion) on a logistics expansion involving the Sand Hills NGL Pipeline and Gulf Coast Express Gas Pipeline. DCP recently signed a letter of intent with Targa Resources (TRGP) and Kinder Morgan (KMI) to jointly develop the Gulf Coast Express project. For details, read TRGP, KMI, and DCP to Jointly Develop Gulf Coast Pipeline.
Approximately 53.8% of analysts surveyed by Reuters rate DCP Midstream a “hold,” 30.1% rate it a “buy,” and the remaining 15.4% rate it a “sell.” In the next article, we’ll look into the correlation between Mid-Con Energy Partners (MCEP) and crude oil.