TPH Midstream Primer

Bradleyy Olsen
bolsen@tudorpickering.com
(713) 333-7693
Differentials and Differentiation

TPH Midstream Sector Initiation
July 7
7, 2011
**IMPORTANT DISCLOSURES BEGIN ON PAGE 71 OF THIS REPORT**
Whats in This Report

State of the Midstream Industry
Performance Retrospective
Crude/NGL Growth Forecast
Pipeline Opportunities
Gas Pipelines
p
Crude Pipelines out of Cushing, OK
NGL Pipelines out of Conway, KS
Storage Opportunities
Natural Gas Storage
Crude and Products Storage
pp
NGL Value Chain Opportunities
Implications of North America as low-cost supplier

Eagle Ford, Marcellus, Bakken NGL Discussion
Downstream implications of massive NGL growth
Many American NGLs wont be consumed by Americans
2
Key Midstream Takeaways

We have seen a wave of unconventional dry gas activity; the drill bit has now turned to
crude and wet gas.
Gas infrastructure received multibillion dollar investments throughout the 2000s; oil and
NGLs did not liquids infrastructure is outdated and theres
there s a lot of work to do.
do
Whats old is new again: the US is generally short liquids infrastructure in areas with
existing assets; this increases barriers to entry, and gives existing operators a natural edge
in bidding for future projects at attractive IRRs. Examples:
pipelines
p
existing
g infrastructure is expanding
p
g to take advantage
g of
Marcellus takeawayy p
new Marcellus volumes; expansion economics make these projects much more attractive
than the pipe newbuilds of the late 2000s.
Cushing, OK expect returns on contracted storage and (non-Keystone) pipelines to the
Gulf to be very attractive over extended (5-10 year) terms.
Mont Belvieu,
Belvieu TX NGL fractionation is practically an oligopoly
oligopoly, and barriers to entry
are high. NGL fractionation projects are currently being subscribed with 7-10 year takeor-pay contracts with 15%+ unlevered economics.
Eagle Ford gathering and processing kudos to midstream operators for seeing this thing
coming years ago well, maybe they didnt, but theres a lot of empty field-level
g ramped
p up
p for attractive,, often fee-based,, IRRs.
infrastructure that is being
Dust off that export dock you dont have to wait for LNG export terminals we can
export gas BTUs in NGL form. America is seeing a burgeoning energy export renaissance
in NGLs, and we are displacing crude and natural gas imports.
Suddenly, buried steel is a lot more interesting
THE STATE OF THE INDUSTRY
Quite Simply: Its About Differentials

DIFFERENTIAL - in the energy industry, this word refers to a price difference
between fungible units of energy.
As the result of a grand cosmic joke, energy is often found where people arent.
aren t.
When a barrel of oil is produced in western Canada or a cubic foot of gas is produced
in the Permian basin, it is not worth very much. Between the wellhead and the final
consumer lies the midstream sector.
Geographic differentials demand is limited near most hydrocarbon production
sites. Midstream services include the pipeline to bring hydrocarbons to market.
Seasonal differentials you might produce oil when there is no way to take it off
the lease, or deliver gas to a city on a 70 summer day. Midstream provides
storage capacity,
capacity allowing the market to absorb differences in the timing of
production and consumption.
Quality differentials you wouldnt fill your car with crude; similarly, natural gas
straight from the well is often dangerous to consume in a home or business.
Midstream processes and standardizes many of the hydrocarbons we consume.
consume
The midstream industry exists in order to reduce differentials, but it also profits
from them. As a result of this fact, the midstream sector is dynamic, even when
production, prices, supply, and demand are stagnant or even declining (as long as
they
h d
dont
all
ll stagnate together).
h )
5
This Aint Your Parents Midstream Industry

The midstream industry is in the middle of an unprecedented transformation, a result of
the revolution in North American unconventional resource development
Midstream has historically received less investor attention than E&P and OFS.
OFS Why?
As a result of declining oil and stagnant gas domestic production in the 1970s-2000s,
midstream assets were often underutilized, and not seen as value-drivers.
Oil and gas production from unconventional resource development is increasing
rapidly
idl and
d iinfrastructure
f t t
access iis no llonger a
given
i
ffor producers
d
Midstream has been largely occupied by small-caps with limited institutional
ownership, mainly due to ~50% of sector market cap being partnerships (MLPs)
This has begun to change as investor demand has reduced public valuation penalty
for midstream assets housed in a C-corp structure
Lower correlations with commodity prices than E&P and OFS
Midstream investments provide leverage to trends that are arguably more durable
and secular than commodity prices (domestic oil/gas production volumes
volumes, producer
migration to unconventional basins, increased US import/export of oil/gas/NGLs)
Assets historically found inside larger energy companies
Asset rationalization by large-cap energy companies has provided a steady stream of
midstream
id t
M&A opportunities
t iti over th
the pastt 10
10+ years
The Midstream Value Chain
Generally riskier
approaching the wellhead
1.
2.
Generally less risky approaching

point of consumption
Proximity to supply increases risk generally speaking, the closer to the wellhead, the higher
the dependence on a single basin, single field or even a single well. Demand centers, on the
other hand, are relatively stable and immobile over time.
Field assets are more likely to have commodity exposure historically controlled by producers,
gathering
g
g and processing
p
g was once effectivelyy an extension of the E&P business. Crude
gathering services are exposed to the front end of the futures curve, while gas processing is
often exposed to gas and NGL pricing.
7
Midstream in a Portfolio
Correlation of midstream performance to commodities is substantially lower than for
E&P/OFS
Midstream commodity leverage (especially to crude) has markedly increased in the
last decade as a result of two factors:
disproportionate share of commodity-levered (gathering and processing, E&P)
midstream IPOs in the late 2000s
increased
i
d participation
ti i ti b
by macro-driven
di
iinstitutional
tit ti
l energy iinvestors
t
Correlation of Daily Returns to Oil
Correlations of Daily Returns to Gas
70.0%
50.0%
60.0%
40.0%
50.0%
30.0%
40.0%
20.0%
30.0%
10.0%
20.0%
0 0%
0.0%
10.0%
(10.0%)
0.0%
E&P
OFS
(20.0%)
MLP
E&P
OFS
MLP
2000
2001
2002
2003
2004
2005
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2006
2007
2008
2009
2010
2011
Source: Bloomberg
Midstream Businesses are NOT Toll Roads

Contrary to the misleading impression conveyed by prominent TV talking heads and
some research analysts, midstream businesses and MLPs in general cannot
accurately be described as toll roads, (i.e., volumetric businesses with minimal
commodity exposure)
Almost every publicly-traded midstream company has margins that are impacted,
directly or indirectly, by commodity prices. For example:
Gathering/processing companies often go long the hydrocarbon at the wellhead
Pipelines often sell gas, allocated to them as fuel to operate their pipes
Refined product storage operators can benefit from blending cheaper NGL
feedstocks, in effect capturing the spread between blendstocks and gasoline
Gas storage operators charge a fee per mcf per month. Historically, higher gas
prices have meant higher seasonal spreads in the gas futures market
T
Transportation
t ti activity
ti it iis correlated
l t d tto gas d
demand.
d E
Even ttake-or-pay
k
pipelines
i li
can earn 10%-15% of total revenues by utilizing the pipes full capacity
NGL fractionators are indirectly levered to liquids prices, as liquids prices
g rigs
g targeting
g
g dryy vs. NGL-rich g
gas
determine the amount of drilling
But Midstream Businesses are Anchored by Stable Trends

Refined Products Transportation and Storage MLPs vs.
Consumption and Product Prices
Although we find the idea

of midstream = toll
road to be overly
simplistic,
p
we do not
want to understate the
stability of many
midstream businesses.
300
250
200
150
100
50
0
2006
2007
Refined Products Performance
2008
2009
RBOB/Diesel 2:1 Price Composite
2010
2011
Refined Products Consumption
N t
Natural
lG
Gas T
Transportation
t ti MLP
MLPs vs. C
Consumption
ti and
d
Natural Gas Prices
250
200
150
100
50
0
2006
2007
2008
Gas Transportation Performance
2009
NG Price
2010
2011
Long-haul transportation
and storage near demand
centers are the most
stable midstream
businesses, due to
proximity to consumers
(see table on next page).
page)
At left, the equalweighted performance of
long-haul natural gas and
refined products equities
illustrates that pipelines
have been more stable
than the commodities
they transport
NG Consumption
Source: Bloomberg & EIA

Notes: Refined products performance is equal-weight index of BPL, HEP, MMP, NS, SXL, TLLP, TLP;
Natural gas performance is equal-weight index of BWP, EPB, SEP, TCLP
10
Returns Across the Value Chain Gas and NGLs

Anatomy of the Natural Gas Midstream Value Chain - Wellhead to Consumer
Gathering
Networks of small pipelines
(2"-16") take gas from
wellhead
Processing
Absorption and cryo expansion
to extract heavier hydrocarbons
(NGLs) from gas stream
Storage - Gas
Depleted reservoirs and salt dome
caverns, located near supply or
demand centers
Transportation - Gas
Large-diameter pipes (16"-42"),
move gas from field, intra- or
interstate
Fractionation
Separates raw NGLs into pure
products for use by end consumers
Supply
Source
Gas wells
Gathering systems
Gatherers or processors in supply

areas, large pipes in demand areas
Dry gas can come from gathering;

residue gas from processing plants
Processing plants supply "Y-grade,"

Y grade, Raw NGLs from field, purity
or raw NGLs to fractionators
products from fractionators
Destination
Processing plants and long- Residue natural gas heads to

haul pipes, sometimes via
transport pipelines; NGLs head
several larger gathering pipes to fractionating facilities
Gas is injected and withdrawn by

utilities, aggregators, financial
speculators, who ship it to the
destinations under "Transportation Gas"
Local distribution companies, power Either pipeline, truck, or rail delivers

plants, industrial facilities
to end user, depending on product
(details under "Transportation NGL")
See "Transportation - NGL"
Ethane: ~100% petrochemical

Propane: 44% petchem, 41%
residential/comm, 7% ag.
Isobutane: 79% fuel blending,
21% propellant and other
Butane: 85% fuel blending,
15% other
Contract
Structure
Without processing,
contracts are typically
volumetric; rarely take-orpay/cost of service.
Potentially no contractual
term fro service, potential
multi-year or life-of-lease
commitments for a given
acreage position.
Keep-whole: (long NGLs, short

gas) mainly in low-btu areas but
becoming less common;
%of Liquids/% of Proceeds:
(long NGLs/long NGLs+gas)
common in high-btu gas areas;
Fee-based: now common as
E&Ps want more NGL leverage
Contracts rare, mkt share relies
on connects w/ gatherers
Monthly fee, based on variables

such as capacity reserved, amount
of maximum injection or withdrawal
per day, and accessible pipeline
interconnects.
New contracts approx. 1-5 years
Intrastate and interstate typically

have reservation (take-or-pay)
component, volumetric usage fee,
potential fuel retention (long nat gas)
component. Reservation is typically
larger % of total fees on interstate,
and interstate rates are governed by
utility-style regulatory mechanism
with periodic tariff reviews.
New contracts approx. 10-20 yrs.
Typically volumetric fee-based; "fracor-pay" contracts common in

current tight mkt. In certain cases
(specialized frac such as butane
isomerization, propylene splitting),
contract is like percent of liquids
New contracts approx. 5-10 yrs.
Typically bundled service with

fractionation, since NGLs are
fractionated at major centralized
facilities (as opposed to being
gathered from disparate basins),
and are typically stored waiting for
fractionation or waiting to be
shipped from fractionator
Contracts approx. 1-4 yrs. if not
bundled.
Regulated tariffs on interstates.

NGL pipes have volumetric fees
that adjust with PPI index.
Intrastate pipes are typically
volumetric and are indirectly
influenced by PPI index.
Newbuild refined pipes may
have LT agreements with major
customers, but most pipes
tend to rollover without
Risk
Factors
No exploration risk, but other

E&P risks - well failure risk,
risk from declines and basin
economics remain; often
liable for downtime and
exposed to compressor and
fuel costs
KW long NGL and short gas

margins are very volatile
POL/POP make processor more
like E&P than a "toll road"
Fee-based volume risk, but
supply more diversified than
gathering systems
Fees determined by seasonal

spread (futures indicate cost to buy
in winter and sell forward in
summer). Baseload utilities less
sensitive to seasonal spread, but
incremental customers typically are
financial and "play the spread"
New pipes contracted with long

terms, very low-risk; old or marginal
pipes have shorter rollovers and
often offer discount vs. regulatory
rate. Long-term, risks from lowercost competitors, decline in
differential due to excess pipe
capacity
Fee-based facilities near demand

centers reduces supply risk. Fees
fluctuate based on demand for purity
products, available frac capacity,
and influx of raw NGLs to frac
centers
Storage services less valuable

during times of low fractionation
capacity utilization, due to slack in
NGL mkts
Volumetric risks. For raw NGL

pipes, risk to basin NGL
extraction economics; for purity
pipelines to end consumers,
exposure to downtime at
individual facilities. Long-term,
risks from declining differentials
due to new competitors and
Fee-based contract is most

stable available option for
processors; some opex passthroughs are possible
Long-term contracts
contracts, higher % utility Typically very stable biz; contracted
customers, more connectivitiy with rates most stable, as exempt from
long-haul pipelines is also beneficial reg. review; negotiation can
maximize take-or-pay and duration
Description
cases, gatherer can

Possible Risk In rare cases
negotiate "cost recovery" to
Mitigants
reduce vol. risk.
Acreage/multi-yr dedications
more common
TPH Est. IRR
Required for
New Capex
12%-20%
10%-17%
(higher returns required to take
commodity risk)
9%-15%
7.5%-11%
(can be higher in case of
expansions; see FERC section)
Storage - NGL
Storage necessary to manage
demand shortfalls during routine
maintenance at petchem plants
Transportation - NGL
NGLs from field to fractionator
or from fractionator to user in 6"18" pipes. Rail/trucks are
alternative purity transport
Raw lines take NGLs from field
to fractionator, purity/batched
lines move products to end
users
Frac-or-pay provides for a deficiency Often rolled into bundled take-or-pay Take-or-pay provisions can be
fee (approx. 70%-80% of throughput fractionation contracts
negotiated in some cases
fee) if not used. Location nearby
custs support margins
10%-14%
9%-12%
(when offered as a standalone
service apart from fractionation)
8%-12%
Note: TPH estimates off target

g IRRs do not encompass
p
the ffull range
g off IRRs on actual newbuilds,, expansions
p
and acquisitions.
q
Theyy are based on discussions with industryy
management teams and reflect targets
11
Returns Across the Value Chain Petroleum

Anatomy of the Petroleum Midstream Value Chain - Wellhead to Consumer
Description
Gathering
Small pipelines (2"-16") and
trucking services take crude
from wellhead to larger pipes
Storage - Crude Oil

Multi-thousand bbl steel
cylinders at pipeline origins and
refineries. Often able to blend
d
Crude gathering lines, gathering
trucks; larger terminals serviced
b pipelines
by
i li
and
d also
l railil
Transportation - Crude Oil

move crude from field gathering or
import hubs to refineries
Refining
Generally considered "downstream."
Converts crude into consumable
products like fuels, distillates
Storage - Refined Products

Storage at refineries and near
demand centers to intermediate
production w/ seasonal demand
Transport. - Refined Prods.

move crude from refineries
Ports, producing basins
Crude pipelines and terminals
Refineries
Refineries
End consumers via pipelines,

barges, truck and rail
End consumers
Terminals near demand centers,

airports, wholesale locations. From
terminals, typically trucked to retail
locations
Supply
Source
Crude wells
Destination
Terminals at refineries or
origins of long-haul pipes
Ultimate destination for crude is

always a refinery; terminals can
be on-site at refinery; can also
be aggregated at storage hub,
blended, then shipped to
refineries
Terminal storage hubs are an

intermediate destination, refineries
are ultimate destination
Contract
Structure
Gathering most competitive,

least contracted segment of
chain; competition for
takeaway and risk from
buying crude at wellhead.
Upside for gatherers in
futures mkt: when future
prices are higher, gatherers
can store crudes; when
lower, incentive to deliver
Monthly fee, based bbls of

capacity, number of accessible
pipeline interconnects, blending
services, speed of delivery to
pipelines. With current shifts in
crude supplies in N. America,
blending to meet refinery specs
is increasingly valuable.
New contracts approx. 3-10
years

Purchases crude, sells end
Have volumetric fees that adjust with products
the PPI index. Intrastate pipes are
typically volumetric and are
indirectly influenced by PPI index.
New pipes may have LT agreements
with major customers, but most
pipes tend to rollover without
contracts.
Monthly fee, based bbls of capacity,

number of accessible pipeline
interconnects, blending services,
speed of delivery to pipelines. With
shift in hydrocarbon supply in N.
America and changing refinery
outputs, blending to meet consumer
demand is growing market.
New contracts approx. 3-10 years

Have volumetric fees that adjust with
the PPI index. Intrastate pipes are
typically volumetric and are
indirectly influenced by PPI index.
New pipes may have LT agreements
with major customers, but most
pipes tend to rollover without
contracts.
Risk
Factors
Pipeline gathering exposed

to risks from declines and
basin economics; trucks
have low barriers to entry
and depreciate rapidly.
Persistent low futures pricing
may increase fee/bbl but
typically hurts overall
On-site terminals at refineries

are exposed to refinery's
competitive
p
p
position; terminals
at hubs are exposed to
supply/demand at hub, which
may change with crude supply
dynamics (see Cushing
discussion below)
Pipes transporting out of crude

basins are exposed to basin
economics; p
possible competition
p
from newbuild pipes
On-site terminals at refineries are

exposed to refinery's competitive
position; g
p
generally
y low barriers to
entry
Volumetric risks. For raw NGL

pipes, risk to basin NGL extraction
economics; for p
purity
yp
pipelines
p
to
end consumers, exposure to
downtime at individual facilities
Long-term contracts, higher %

refinery customers, more
connectivitiy with long-haul
pipelines is also beneficial
Long-term agreements possible, but Refining businesses riskier than

generally liquids lines are dependent midstream businesses, generally
on S&D dynamics for volume
not suitable for midstream business
model
Long-term contracts, agreements

with well-positioned refineries ,
stable demand (retail vs. wholesale
and airports)
Long-term agreements possible, but

generally liquids lines are dependent
on S&D dynamics for volume
10%-17%
10%
17%
8%-12%
8%
12%
Possible Risk The high risk inherent in

crude gathering is mitigated
Mitigants
by potential margins from
profitable futures sales
TPH Est
Est. IRR
Required for
New Capex
15%-25%
15%
25%
10%-20%
10%
20%
8%-12%
8%
12%
Highly cyclical and prone to long

periods of oversupply with shorter
p
periods
of strong
gp
profitability
y and
strong demand
Note: TPH estimates off target

g IRRs do not encompass
p
the ffull range
g off IRRs on actual newbuilds,, expansions
p
and acquisitions.
q
Theyy are based on discussions with industryy
management teams and reflect targets
12
Its Been a Heady 3 Years
PERFORMANCE RETROSPECTIVE
13
Midstream Performance Overview

Consistent with the broader market, we have seen a strong recovery in the
midstream sector since the end of 2008
As midstream valuations recovered from the financial crisis, investors spent
late 2009 and 2010 moving further out the risk curve, favoring companies with
long commodity exposures and cyclical business models.
Specifically
Specifically, midstream companies with liquids (NGL and crude) length have
benefitted as NGL and crude prices have performed strongly vs. dry gas.
As the cycle has continued, we have seen consolidations and restructurings
drive performance:
The majority of all publicly-traded MLP general partners have been
consolidated into their respective MLPs at healthy premia.
STR,, WMB,, and EPs restructurings
g have driven p
performance.
Going forward, we prefer exposure to liquids volume growth, rather than prices
(fee-based processing/fractionation). We believe the rapid increase in NGL
volumes will cause choppiness in NGL prices, but we believe the volume growth
trend is durable.
14
2009-Present: Taking Stock of a Wild 30 Months

Performance since 2008 has been broadly outstanding, with every segment generating >100%
total returns after 18 dismal months.
Total Return (%)
400
300
200
100
0
Gathering and
P
Processing
i g
Other
MLP GPs
C-Corp
GP
GPs
Refined Product
MLP
MLPs
Shippers
Alerian Total Return
Midtream
CC
C-Corps
Regulated Gas
Pi li
Pipelines
Diversified MLPs
Propane and
H ti g Oil
Heating
800
700
600
500
400
300
200
100
0
-100
-200
MWE
CQP
APL
NGLS
ATLS
WPZ
DPM
NRGP*
XTEX
EPE*
BGH*
RGNC
GEL
CPNO
CMLP
NMM
TOO
MMLP
SUG
ETE
TLP
WES
XTXI
CLMT
PVG*
EROC
TGP
HEP
BKEP
PVR
EEP
EXLP
OKE
GLP
SGU
EP
EPB
NRGY
WMZ*
EPD
TCLP
OSP*
NSH
BPL
MMP
WMB
OKS
SXL
PAA
ENB
HLND*
SE
FGP
BWP
APU
NS
KMP
SEP
TK
TRP
SPH
MGG*
CPLP
ETP
TNH
HPGP*
USS*
Total Return (%)

T
GPs have notably outperformed. Investors will need to find alpha elsewhere as the investible
universe of GPs has been limited by buyouts/consolidations (buyouts marked with *).
Alerian
le a Total
otal Return
etu
MLP GPs
GP
CC
C-Corp
GP
GPs
Mid t
Midstream
C
C-Corps
C
Gathering & Processing
Shippers
Diversified MLPs
Regulated Gas Pipelines
Other
Refined Product MLPs
Propane & Heating Oil
15
2009-Present (Continued)
Although much of 2009 performance was mean reversion, subsequent outperformance has been driven
by secular growth from leverage to NGL economics (red), dropdowns (yellow), takeouts and corporate
actions (green), recoveries from distress (sky blue)
Refined Product
250
200
200
To
otal Return (%)
To
otal Return (%)
Diversified
250
150
100
50
0
150
100
50
0
EEP
EPD
OKS
PAA
KMP
TLP
ETP
MMP
SXL
NS
200
Total Return (%)
Total Return (%)
BPL
800
600
400
200
0
150
100
50
0
MWE
APL NGLS WPZ
DPM XTEX RGNC CPNO CMLP WES EROC PVR HLND*
200
Total Retturn (%)
HEP
EPB
WMZ*
TCLP
BWP
SEP
Group Average
150
100
50
0
SGU
NRGY
FGP
APU
SPH
16
Although much of 2009 performance was mean reversion, subsequent outperformance has been driven
by by secular growth from leverage to NGL economics (red), dropdowns (yellow), takeouts and corporate
actions (green), recoveries from distress (sky blue)
NMM
TOO
TGP
OSP*
CPLP
CQP
GEL
Total Retu
urn (%)
200
150
100
50
MMLP
CLMT
BKEP
EXLP
GLP
TNH
C-Corp GPs
250
200
150
100
50
0
SUG
EP
WMB
ENB
SE
TRP
STR
MLP GPs
XTXI
OKE
TK
Group Average
600
Tottal Return (%)
700
600
500
400
300
200
100
0
USSPQ*
Midstream C-Corps
250
Total Retu
urn (%)
Other
Total Return (%)
Total Return (%)
Shippers
pp
300
250
200
150
100
50
0
-50
-100
100
500
400
300
200
100
0
ATLS
NRGP*
EPE*
BGH*
ETE
PVG*
NSH
MGG*
HPGP*
17
2010-Present: Risk On Trade has Driven Performance
Total Return (%))
Whether financial leverage (GPs) or commodity leverage (gathering & processing), the last 18 months
have been good for risk. While 2009 involved a mean reversion play, emboldened investors were
rewarded for moving out the risk curve in 2010.
100
80
60
40
20
0
C-CorpGPs/
MLP GPs
Gathering and
Processing
Midstream
C-Corps
Shippers
Refined Product
MLPs
Diversified MLPs
Other
Regulated Gas
Pipelines
Propane and
Heating Oil
Interestingly, the 5 top performers over this period were dividend/distribution cutters during 2008-2009
300
200
150
100
50
0
-50
APL
ATLS
EROC
XTEX
EP
XTXI
WES
WPZ
MWE
SUG
OKE
TOO
CPNO
NGLS
CQP
GEL
ETE
TGP
DPM
MMP
OKS
WMB
EPD
HEP
ENB
NSH
EPB
TK
SE
NMM
TNH
CMLP
SGU
TLP
TCLP
SXL
PVR
RGNC
MMLP
TRP
PAA
CLMT
KMP
BPL
EXLP
NS
APU
EEP
GLP
SPH
FGP
ETP
CPLP
SEP
NRGY
BWP
BKEP
Tottal Return (%)
250
Midstream C-Corps
C-Corp GPs/MLP GPs
Other
Diversified MLPs
Shippers
18
Commodity-levered names (red), dropdown MLPs (yellow), post-distress (sky blue) and corporate action
stories (green) have generally outperformed
Diversified
Refined Product
60
60
50
To
otal Return (%)
Tota
al Return (%)
50
40
30
20
40
30
20
10
10
0
OKS
EPD
PAA
KMP
EEP
MMP
ETP
Total Retu
urn (%)
Total Retu
urn (%)
250
200
150
100
50
0
WPZ MWE CPNO NGLS DPM CMLP PVR RGNC
Group Average
TLP
SXL
BPL
NS
300
APL EROC XTEX WES
HEP
50
45
40
35
30
25
20
15
10
5
0
EPB
TCLP
SEP
BWP
19
Commodity-levered names (red), dropdown MLPs (yellow), post-distress (sky blue) and corporate actions
(green) have generally outperformed
Total Return (%))
Total Return (%))

50
40
30
20
10
0
SGU
APU
SPH
FGP
Shippers
80
60
40
20
0
NRGY
TOO
TGP
120
100
80
60
40
20
0
CQP
GEL
TNH
MMLP
CLMT
EXLP
GLP
BKEP
C-Corp GPs/MLP GPs
250
Total Return (%)
CPLP
Midstream C-Corps
70
60
50
40
30
20
10
0
-10
-20
Total Retturn (%)
Total Retturn (%)
Other
NMM
EP
SUG
WMB
ENB
SE
STR
TRP
Group Average
200
150
100
50
0
ATLS
XTXI
OKE
ETE
NSH
TK
20
2011 YTD Reaching Cruising Altitude

Total returns shown below for 2011 YTD performance. GPs and C-corps have outperformed, the
former due to performance by liquids-levered GPs, the latter due to corporate actions (WMB, EP)
Gas storage, propane and shippers have been held back by weak fundamentals and weak results
Total Return (%)
T
30
20
10
0
-10
Midstream
C-Corps
C-Corp GPs/
MLP GPs
Gathering and
Processing
Diversified MLPs Refined Product

MLPs
Other
Shippers
Regulated Gas
Pipelines
Propane and
Heating Oil
Gas Storage
80
70
60
50
40
30
20
10
0
-10
-20
SUG
EP
ATLS
OKE
APL
XTXI
TNH
XTEX
EROC
WMB
TRGP
WPZ
WES
TRP
ENB
ETE
MWE
SE
DPM
OKS
TOO
HEP
MMP
NGLS
GEL
EPB
EPD
CPNO
KMP
SXL
PAA
CLMT
SGU
CMLP
NSH
CHKM
TGP
MMLP
BKEP
BPL
EEP
SEP
TLP
NMM
EXLP
RGNC
CPLP
PVR
ETP
SPH
TK
NS
GLP
APU
BWP
NRGY
NRGY
TCLP
PNG
FGP
SEMG
NKA
CQP
Total Return (%)
Alerian Total Returns
Gathering
g & Processing
g
Propane
p
& Heating
g Oil
GP Holding C-Corps/MLP GPs
Other
Shippers
Gas Storage
Midstream C-Corps
Diversified MLPs
21
2011: Life as a Fairly Valued Sector

After perhaps once-per-lifetime returns in 2009-2010, 2011 has seen continued outperformance from liquidslevered names (red), post-distress stories (sky blue), corporate actions (green), and dropdowns (yellow).
Diversified
Refined Product
20
Total Return (%)
Total Return (%)
25
15
10
5
0
-5
5
WPZ
OKS
EPD
KMP
PAA
EEP
12
10
8
6
4
2
0
-2
-4
-6
6
HEP
ETP
BPL
TLP
NS

6
4
2
0
-2
-4
-6
APL
XTEX EROC WES
MWE
DPM NGLS CPNO CMLP CHKM RGNC PVR
-8
EPB
Gas Storage
Total R
Return (%)
SXL
40
35
30
25
20
15
10
5
0
-5
Total Return (%)
Total Returrn (%)
MMP
8
6
4
2
0
-2
-4
4
-6
-8
-10
-12
SEP
BWP
TCLP
Group Average
NRGY
PNG
NKA
22
2011: Life as a Fairly Valued Sector-Continued

After perhaps once-per-lifetime returns in 2009-2010, 2011 has seen continued outperformance from liquidslevered names (red), post-distress stories (sky blue), corporate actions (green), and dropdowns (yellow).
SGU
SPH
APU
NRGY
TOO
TGP
Total Retturn (%)
30
20
10
0
-10
NMM
CPLP
Midstream C-Corps
80
-20
60
40
20
0
-20
TNH
GEL
CLMT
MMLP
BKEP
EXLP
GLP
CQP
SUG
EP
TRP
ENB
SE
STR
SEMG
GP Holding C-Corps/MLP GP'S
50
Total Return (%)
12
10
8
6
4
2
0
-2
-4
FGP
Other
40
Total Retturn (%)
Shippers
Total Return (%)
Total Return (%)

8
6
4
2
0
-2
-4
-6
-8
40
Group Average
30
20
10
0
-10
ATLS
OKE
XTXI
WMB
TRGP
ETE
NSH
TK
23
Midstream Valuations Imply Growth

MLPs are not compellingly cheap, compared to historical yield spreads
MLPs are Reasonably Cheap vs. 10-Year Treasury
MLP are Fairly Valued vs. 10-Year Baa Industrial

4.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1 00%
1.00%
0.00%
3 00%
3.00%
Cheap
2.00%
Cheap
1.00%
0.00%
-1.00%
Avg Spread
+ 1 Std Dev
-1 Std Dev
AMZ-Baa Spread
Avg Spread
+ 1 Std Dev
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
AMZ-10 Yr Spread
-1 Std Dev
MLP are Moderately

M d
t l Expensive
E
i vs. 10-Yr
10 Y AA Munis
M i
MLP are C
MLPs
Compellingly
lli l Ch
Cheap vs. REIT
REITs
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
Expensive
-2.00%
2 00%
Expensive
8.00%
Cheap
6.00%
Cheap
4 00%
4.00%
2.00%
Expensive
AMZ-REIT Spread
Avg Spread
+ 1 Std Dev
-1 Std Dev
AMZ-Muni Spread
Avg Spread
+ 1 Std Dev
2010
200
09
200
08
200
07
200
06
200
05
200
04
200
03
200
02
200
01
200
00
1999
1998
1997
1996
0.00%
1995
2010
2
2009
2
2008
2
2007
2
2006
2
2005
2
2004
2
2003
2
2002
2
2001
2
2000
2
1999
1998
1997
1996
1995
Expensive
-1 Std Dev
Source: Bloomberg
24
Midstream C-Corp Valuations

Midstream C-Corps are cheaper than MLPs, compared to historical yield spreads
C-Corps are Reasonably Cheap vs. 10-Year Treasury C-Corps are Cheap vs. 10-Year Baa Industrial
1.00%
4.00%
0.00%
3 00%
3.00%
-1.00%
Cheap
0.00%
-3.00%
-1.00%
-4.00%
-2.00%
2.00%
-5.00%
-3.00%
-6.00%
Expensive
C-Corp-10 Yr Spread
Avg Spread
+ 1 Std Dev
C-Corp-Baa Spread
-1 Std Dev
CC
C-Corps
are C
Compellingly
lli l Ch
Cheap vs. REIT
REITs
Avg Spread
+ 1 Std Dev
2010
2009
2008
2007
2006
2005
2004
2003
2002
1999
2010
2009
2008
2007
2006
2005
2004
2003
-7.00%
2002
2001
1999
2000
Expensive
-4.00%
Cheap
-2.00%
2001
1.00%
2000
2.00%
-1 Std Dev
CC
C-Corps
are F
Fairly
i l V
Valued
l d vs 10-Yr
10 Y AA Munis
M i
4.00%
1.00%
3.00%
0.00%
Cheap
-1.00%
2.00%
-2.00%
1.00%
-3.00%
0.00%
-4.00%
Cheap
-1.00%
-2.00%
C-Corp-REIT Spread
Source: Bloomberg
Avg Spread
+ 1 Std Dev
-1 Std Dev
C-Corp-Muni Spread
Avg Spread
+ 1 Std Dev
2010
0
2009
9
2008
8
2007
7
2006
6
2005
5
2004
4
2003
3
2002
2
Expensive
-3.00%
2001
1
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
-6.00%
2000
0
Expensive
1999
9
-5.00%
-1 Std Dev
25
Crude and NGL Volumes are Driving Midstream Opportunity
LIQUIDS GROWTH
26
Midstream Growth Will Come from Liquids Supply

Shift from dry gas BTUs to wet gas BTUs has been underway for the past 18 months
US Rig Count by Target NGL Targets Included in Gas Rig Count, Understating Impact of Shift
1 500
1,500
1,000
500
0
Oct-06
Source: BHI
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Gas
Oct-09
Apr-10
Oct-10
Apr-11
Oil
We believe that NGL volumes could increase by 700 kbpd by 2015,

2015 roughly 25% higher than
current levels. This includes production declines in Gulf of Mexico and mature onshore
basins, requiring construction of nearly 1 mmbpd of pipe capacity
This tectonic shift in the composition
p
of US hydrocarbon
y
p
production p
presents midstream
opportunities throughout the value chain, from upstream (gathering, trucking, processing,
storage terminals) to downstream (pipelines, fractionation, storage)
Crude oil/condensate growth will come from Canada, Bakken, Eagle Ford, Permian
NGL growth
h will
ill come ffrom E
Eagle
l F
Ford,
d G
Granite
i W
Wash,
h P
Permian
i
27
Liquids Growth is Going to be BIG

Thousand Barrrels/Day
Forecast Liquids Growth from Eagle Ford and Granite Wash

2,000
1,500
1,000
500
0
2011E
Source: TPH Estimates
2012E
Eagle Ford Crude
2013E
2014E
2015E
2016E
Granite Wash Crude
Eagle Ford NGL
Granite Wash NGL
2017E
Although emerging horizontal plays within the basin make estimates more difficult, Permian Basin NGL
production could add over 200 kbpd by 2015, by our estimates
Midstream service providers are positioned to participate in that growth from the wellhead to the
downstream delivery point.
point The midstream industry has not had a similarly target
target-rich
rich environment in their
(relatively brief) history as a substantial standalone sector.
This wave of growth will not fuel a 2007/08-style boom, when creeping commodity leverage drove rapid
growth followed by a cash flow collapse for some midstream companies:
Largely fee-based,
fee-based even in some cases for wellhead services (E&Ps now prefer to retain crude/NGL
exposure) much less volatile but slightly lower returns through an economic cycle
Increasingly contracted term contracts for processing/fractionation assets, more life-of-lease acreage
dedications, minimum volume gathering commitments
7/1/11 NYMEX gas price of $4.32/BTU is well below NYMEX NGL price of over $15.00/BTU, providing huge
economic
i incentive
i
i
for
f E&Ps
E&P to d
develop
l wet gas and
d crude
d
28
US Liquids Infrastructure is Especially Outdated

We believe the midstream industry has a historic opportunity as US
unconventional production becomes wetter and reinvigorates long-stagnant US
crude and NGLs production.
The Cushing price dislocation has illustrated that US liquids infrastructure is
based on simple assumptions that are becoming antiquated by unconventional
production
Gas Productio
on (bcf/d)
5,000
4,500
Bakken/Permian/Eagle Ford growth is here
60
4,000
50
3,500
40
3 000
3,000
30
2,000
2,500
1,500
20
1,000
10
500
Crude/NGL Production (kbpd))
70
0
1999
2000
2001
2002
2003
Gas Production (ex. Federal GOM)
2004
2005
2006
2007
2008
Crude Production (Ex. Federal GOM)
2009
2010
2011
NGL Production
Source: EIA
29
Remediating Differentials Between Hubs
GAS PIPELINE OPPORTUNITIES
30
US is Long Gas Pipe and Short Oil/NGL Pipe

Natural gas differentials have been drastically reduced over the past several
years by three factors:
>$60 bn of capital spending since 1996 on large-diameter pipelines
Unconventional gas supply (Marcellus gas could reduce imports to NE by up to
6 bcf/d)
Crude oil opportunities from Cushing/WTI dislocation:
1970s-2000s: US increasingly
l short
h
crude,
d current imports 6mmbpd
b dh
higher
h
than 1970s. Pipelines from Canada/ports typically terminate at Cushing, OK
(NYMEX hub, largest in US)
2000s: pipes prepare for coming wave from W. Canada, but they dont
prepare for:
Bakken (~400 kbpd, operators indicate could reach 1.2 mmbpd by 2015)
Eagle Ford crude (~100 kbpd, expected to reach nearly 1 mmbpd by 2015)
US government delaying oil sands pipe (TRPs XL)
Cushing now has ~500 kbpd more inbound than outbound capacity. EPD/ETP
JV has proposed a Double E pipeline to take 450 kbpd to Houston
Rail as swing capacity: shifting supply basins, Cushing bottleneck have led
Kinder Morgan
g and WATCO,, a p
private rail company,
p y, to announce rail p
projects
j
out of Cushing
31
2000s: The First Wave of Midstream Spending

After a few sleepy decades, the midstream
sector saw sharp increases in spending in
the mid-2000s
2008: Peak of the First Wave of the Midstream Boom

Projects Debottlenecking Southeast, Importing LNG
The infrastructure boom in the 2000s was

a distinct development from projects
being developed today:
High regional gas price differentials
indicated that US was short long-haul
transportation
Primary focus: getting emerging gas
supplies LNG, Barnett, Canada,
Rockies - to demand centers
Northeast, Midwest, Florida via
underutilized pipes (Transco, TETCO,
Tennessee)
The long-haul
long haul gas pipeline construction
boom is over, but expansion projects on
existing gas pipelines are expected to
provide an average of $5bn per year of
spending
p
g through
g 2020
2000s Saw Revitalization of Midstream Investment

$12
$
$10
Gas pipeline data shown
$3
$8
$6
$2
$4
$1
$2
$0
Source: EIA, El Paso
$4
$
$0
Capex ($bn, left axis)

2010-20 Est Capex/Yr ($bn, left axis)
Cost per Mile ($mm, right axis)
32
Gas Pipeline Opportunity Set Will Be Smaller

After the first wave of conventional gas-focused infrastructure investment in
the 2000s, much of North America is long gas pipeline capacity
Diff
Differentials
ti l h
have ffallen
ll across mostt major
j h
hubs,
b controlling
t lli ffor H
Henry H
Hub
b price
i
decline.
Returns generally protected by take-or-pay contracts, low utilization can still
marginally
i ll reduce
d
revenue ffrom variable
i bl charges
h
Rockies Express (Opal Hub, WY)

Barnett area buildout (W.TX)
p
((E.OK))
Midcontinent Express
Florida Gas Transmission VIII (FL)
Ruby (Opal Hub, WY)
Differential as % of Henry Hub
Tens of billions of dollars of newbuild pipe capacity now, on average, out of the
money (i.e., netbacks are worse when shipped vs. sold locally).
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
(5.0%)
Average, 2005-2009
Average, 2010-Current
33
Northeast Gas Differentials Persist, Presenting Opportunity

New York City Gate differential has persisted at an average >$0.80, increasing
as % of HH price from 12% to 19%
Opportunities to connect nearby Marcellus supply to eastern city gates:
>$4bn of announced Marcellus opportunities for TGP (EP, $1.2 bn), Transco
(WPZ/WMB, $0.6bn), TETCO (SE, $1.75bn)
Expansions are typically offer higher returns than newbuilds, as expansions
can leverage existing property rights-of-way and compression facilities
An effective FERC put can offer return upside on expansions while
providing downside protection through rate cases
Operators strategy for profiting from the NY differential is in its first phase:
Phase 1 (current-2012): plumb Marcellus supplies (TGPs 300 Line, TETCOs
TEAM, Transcos NE Supply Link), move oversupplied Midwest market
eastward
t
d tto NJ/NY (TETCO
(TETCOs TEMAX project)
j t)
Phase 2: move Marcellus gas to markets (TETCOs NJ-NY Expansion, TGPs NE
Upgrade, Transcos NE Connector and Rockaway Lateral) and displace
Canadian imports (EPs
(EP s NSD/proposed IGT backhaul
backhaul, TETCOs
TETCO s proposed
Algonquin backhaul)
34
Phase 1 Marcellus Projects Access Supply

TEAM/TEMAX in same corridor
TGP Projects Underway
NJ-NY
TETCO Projects Underway
Transco Projects Underway
Operator
EP
EP
EP
SE
SE
SE
WPZ
WPZ
WPZ
Project
300 Line Expansion
NE Supply Diversification
NE Upgrade
TEMAX/TIME III
TETCO Appalachia to Mkt
NJ-NY Expansion
NE Supply Link
NE Connector
Rockaway Delivery Lateral
In Service
4Q 2011
4Q 2012
4Q 2013
4Q 2012
4Q 2012
4Q 2013
2013
1H 2014
1H 2014
Total:
Cost ($mm)
Capacity (mmcf/d) Supply/Demand Driven?
$660
350
Supply
$70
250
Supply
$400
636
Demand
$700
455
Supply
$200
190
Demand
$850
800
Demand
$341
250
Supply
$39
100
Demand
$182
647
Demand
$3,442
3,678
Source: public filings, company presentations
35
Phase 2 Marcellus Projects Will Displace Imports

Proposed but not-yet filed with FERC are projects to move gas up Algonquin
and Iroquois and displace Canadian gas from New England markets
El Pasos proposed Iroquois

interconnects could displace
500 mmcf/d by Q4 2014;
small backhaul volumes
possible w/out compression
NJ-NY
Spectras TETCO has proposed a

project to move Marcellus gas up
Algonquin Gas to New England
markets
36
Coal-to-Gas Switching Should Drive Southeast Growth

Coal-to-gas switching (as detailed in TPHs recent report) has driven large gains
in Southeastern gas demand since 2007. This trend is set to continue:
8.5 GW of announced coal retirements through 2020 (equal to ~1.1
1.1 bcf/d of
demand)
Efficient CCGT power gen running at a 42% capacity factor, outlook for gas
demand remains positive
Southeast demographics remain strong:
Population Growth, Census 2010 vs. 2000
Source: US Census Bureau
20%
15%
10%
5%
0%
LA
MS
AL
TN
SC
FL
GA
NC
Southeast
US
Despite current softness in Florida gas differentials, Floridas long-term gas

market growth should be strong, driven by retirements
Softness due to the recent FGT Phase VIII expansion, a project to feed power
demand which was unable to contract final 26% of 820 mmcf/d of capacity
37
Escape from Cushing and the Mid-Continent
LIQUIDS PIPELINE OPPORTUNITIES
38
Well, This is a Conundrum...

Volumes chase volumes: as Cushing has grown larger (18.3 mmbbls of shell capacity to be added
between Q1 2011 and 1H 2012, bringing total to 76 mmbbls) and more liquid (see NYMEX volumes
below), pipeline operators have treated Cushing as a deep demand market, despite constraints:
limited local refinery capacity - 1.1 mmbpd of refining capacity is proximate to Cushing, less than
one d
day off C
Cushings
hi iinbound
b
d pipeline
i li capacity
it
lack of access to Gulf Coast largest Houston-Cushing pipeline, Seaway Crude, sits empty. It is
owned by COP (50% owner, along with EPD), whose refineries enjoy the benefit of cheap crude
feedstocks at its Midcon refineries (Ponca City, OK; Borger, TX; Wood River, IL)
Cushing Hub, the Pipeline Crossroads of North America

Cushing
Seaway
Keystone
Keystone XL
Ponca City 170 kbpd
Borger 146 kbpd
W d Ri
Wood
River 306 kbpd
kb d
Source: CAAP
Fallacy of composition: industry has increasingly built towards Cushing, assuming that everyone was a
price
price taker
taker at Cushing and nobody was a price
price maker
maker
39
Crude Pipelines: Cushing-or-Bust Backfires

Despite record-high storage levels, inflows from oil sands, Bakken,
Permian, and even the Rockies have not sufficiently abated, and
have continued to p
push down WTI p
pricing
g
Due to limited Cushing storage, WTI pricing has not been discounted
to levels comparable with local Bakken pricing; for western
Canadian producers and Permian Basin producers, comparative WTI
pricing is still attractive
$60.00
40,000
$50.00
35 000
35,000
30,000
25,000
$40.00
Storage well above

historical norms
$30.00
$20.00
20,000
$10.00
15,000
$0 00
$0.00
10,000
Differential ($/bb
bl)
Crude Storrage at Cushing (m

mbbls)
Cushing Storage vs. Historic Range on Left Axis;
5,000
($10.00)
($20.00)
6/25/10
9/24/10
2006-2010 Storage Range
12/24/10
2006-2010 Storage Average
LLS-WTI Spread
Canadian Sour-WTI Spread
3/25/11
6/24/11
Trailing 12 Mos. Cushing Storage
Permian-WTI Spread
Source: EIA
40
Potential Outlets to the Gulf Coast

Transcanadas Keystone projects added 156 kbpd into Cushing, with a planned
700 kbpd extension (XL) to move heavy Canadian crudes from Cushing to
Houston markets
Enterprise and Energy Transfers Double E Pipeline would provide the earliest
solution, utilizing existing underutilized natural gas pipeline in Texas to enter
service before the end of 2012
Alternative projects have been proposed Enbridge
Enbridgess Monarch would transport
350 kbpd of light crude to the Gulf Coast. It was re-announced (after being
shelved) in September 2010 has been on hold, awaiting a US gov. decision on XL
and evaluating the long-term demand for Cushing-Houston transportation
Barrels p
per Day
Reversing Available PADD2-PADD3 Transportation is not Enough to Stabilize the Imbalance

180,000
2,500,000
150,000
2,000,000
120,000
1,500,000
90 000
90,000
1,000,000
60,000
500,000
30,000
0
To PADD3 Pipeline
To PADD3 Barge
From PADD3 Pipeline
From PADD3 Barge
Source: EIA
41
Well, Where the Heck are those Pipes?

XL is technically a separate pipeline for purposes of government approval, has
been protested by environmental groups due to the fact that it will increase US
imports of oil sands crude
XL has been delayed by at least a year due to a heavily politicized review
process by the US State Dept., which, unless accompanied by a comprehensive
national energy policy that uses non-market forces to radically alter US crude
g to change
g the fact that US crude supply
pp y is g
getting
g
slates,, will do nothing
heavier and more Canadian
Keystone was approved in 2008 to import 590 kbpd of oil sands crude to
Illinois, and is flowing volumes now
doesn t it make sense to let Transcanada finish
Reasonable questions: doesnt
their project rather than create a bottleneck and distort the price of
crude in the largest oil hub in the world?
One more: wont delaying the approval just encourage competitor
pipelines
p
p
who avoid import
p
p
pipeline
p
status but still ship
p Canadian crude
to the Gulf Coast?
The answers to the former is almost certainly yes, the answer to the
second is objectively yes, as non-import competitor pipelines have been
gp
page)
g )
announced ((see following
42
Handicapping Pipelines out of Cushing

We believe that XL will almost certainly be built (eventually), as Transcanada can most likely
modify their pipeline design to make XL technically a non-import pipeline. Given the political
climate, it is impossible to predict whether this is a 2013 or 2014 event.
Enbridges
Enbridge s (ENB) Monarch project has been on
on-again
again off
off-again
again for several years
years. ENB indicated
in January 2011 that the project is close to receiving the anchor shipper commitment needed to
make it economically viable. We still think that Monarch is unlikely, after XL and Double E are
built.
Enterprise and Energy Transfer have announced a JV (Double E pipeline) to convert existing
T
Texas
iintrastate
t t t ggas pipelines
i li
and
d llay new pipe
i tto b
build
ild a pipeline
i li ffrom C
Cushing
hi g tto th
the G
Gulf
lf
Coast.
InboundPipes
Capacity(kbpd) OutboundPipes
Basin
450.0 BPNo.1
Seaway
350.0 Ozark
S
Spearhead(South)
h d (S h)
193.3
93 3 Osage
O
CenturionNorth
175.0 PoncaCity
KeystonePipeline
156.0 PAAtoCVR
EOGRailtoStroud
60.0 Borger
Other
133.0 Other
Total Inbound
TotalInbound
1 517 3 TotalOutbound
1,517.3
Total Outbound
TPHEstimatedMax.StructuralImbalance:
ProposedOutboundLines
Likelihood
"DoubleE"Pipeline ETP/EPD
High
KeystoneXL
TRP
High
Monarch
h
ENB
<50%
ProFormaStructuralOutboundCapacity
Capacity(kbpd)
175.0
170.0
135.0
3 0
130.0
80.0
59.0
280.0
1 029 0
1,029.0
(488.3)
Inservice Capacity(kbpd)
Q42012
450.0
2H2013
700.0
2014
350.0
661.7
Source: CAPP, press releases, filings
43
Can Trucks or Rail Provide a Release Valve for Cushing?

Over the past year, we have seen Cushing inventories at levels approximately 5.8 mmbbls higher than the previous year
(average 16 kbpd of inventory growth)
Rail will contribute to reducing the bottleneck in 1H 2012.
Rail involves limited capital and typically less than a year of lead time. It also provides destination flexibility for
pp
Rail is more expensive
p
than p
pipelines
p
-$
$4-$6
$ bbls from Cushing
g to the Gulf Coast.
shippers.
Currently, the nearest rail depot to Cushing is Stroud (~20 miles), where EOG ships up to 60 kbpd of inbound Bakken
volumes on their WATCO-operated rail line.
In March 2011, KMP and WATCO announced a project to provide rail takeaway to the Midcon. We expect that this
project could provide up to 70 or 80 kbpd.
We doubt that many rail operators will be lured by the Cushing opportunity, when >1mmbpd of outbound pipelines
are scheduled to come online in 2012/13.
Trucking cannot meaningfully reduce the imbalance.
Trucks can be employed with minimal lead time and capital, but they are expensive - $9-$11/bbl.
>1,400 trucks would need to be employed full-time to take 100 kbpd out of Cushing. In reality, the local
infrastructure (roads, truck racks, etc.) limits trucks to a minor role in offtake.
Trucking industry sources have indicated that hiring truckers on a long-haul route dependent on a volatile
commodity spread would require 1
1+ year term guarantees
Despite the current spread, prospect of being long $11 transport in a trade that has historically seen ~$0
differentials is not attractive for producers/marketers.
Bottom Line: Until pipes arrive in late 2012-2013, spread is likely to remain wide
Sp
pread in $/Barrell
Cushing-Gulf Coast Spread vs. Costs of Transportation

$15 00
$15.00
$10.00
$5.00
$0.00
($5 00)
($5.00)
2000
2001
2002
Rail Cost/Barrel
2003
2004
2005
Truck Cost/Barrel
2006
2007
WTI-LLS
2008
2009
2010
2011
Source: EIA, TPH estimates
44
Crude Transport Opportunities in the Eagle Ford

Although the lack of a local hub makes the differential difficult to observe, the
current lack of crude off-take capacity in the Eagle Ford has forced producers
to rely on high-cost trucking takeaway, reducing crude/condensate netbacks.
Large-diameter oil pipelines have recently been announced out of the oil
window of the Eagle Ford, with an aggregate capacity of at least 1,130 kbpd
by 2014
Operator
O
t
EPD
PAA/possibly CHK and Koch
KMP
Koch
MMP/M3 ((Private
TexStar
Velocity/NS
Koch/Harvest Pipeline
Koch/Harvest Pipeline/NS
Total Proposed Capacity
Hi h Lik lih d Capacity
High-Likelihood
C
it
Pipeline
Pi
li
Origin-Terminus
Oi i T
i
Capacity
C
it
A h
Anchor
Lik lih d
Likelihood
Wilson/LaSalle-Houston
360.0 CHK
Under construction
LaSalle Co.-Corpus
300.0 CHK
High
DeWitt Co.-Houston
300.0 HK
High
Frio/Atascosa-Corpus
200.0 None named Moderate
LaSalle/Live Oak-Corpus
p
180.0 None named <50%
S.TX-Corpus
San Antonio-Corpus
Frio/Atascosa-Corpus
90.0 APC
High
Frio/LaSalle-Corpus
80.0 None named In service
1,730.0
1 130 0
1,130.0
US Development is nearing completion on a 40,000 crude rail hub out of the

Eagle Ford to service local refinery demand
45
Conway to Belvieu The Quiet Cash Machine

Mont Belvieu, Texas is home to roughly 36% of total US nameplate fractionation (NGL
separation) capacity and is Americas largest NGL hub. MB fracs typically command the
highest fees of any US frac facilities, due to proximity of major petrochemical plants (55 bn
lbs/yr ethylene capacity), as well as the large NGL storage caverns nearby.
Conway, Kansas, is the second-largest NGL pricing hub, with 21% of fractionation capacity,
but its lack of local downstream consumers (2.3 bn lbs/yr ethylene capacity) and relative
lack of storage capacity makes it a much less liquid hub than Mont Belvieu.
80%
150
60%
40%
100
20%
50
0%
Conway Disco
ount
Pric
ce (cents/gal)
Conway-Mont
Co
way Mo t Belvieu
elv eu Ethane
t a e Price
ce Spread
Sp ead
200
(20%)
6/1/01
6/1/02
6/1/03
6/1/04
6/1/05
Belvieu 80% Ethane Mix
Conway 80% Ethane Mix
6/1/06
6/1/07
Conway Discount
6/1/08
6/1/09
Avg. Disc. 2001-2008
6/1/10
6/1/11
Avg. Disc. since 2009
Source: Bloomberg
D
Due tto ethanes
th
application
li ti as a petrochemical
t h i l ffeedstock,
d t k ethane
th
pricing
i i outside
t id off MB iis
prone to substantial volatility, reflecting transportation costs to Belvieu as well as local
supply/demand factors.
The differential between Conway and MB has steadily grown as the Conway market has
been inundated with new production from the Rockies.
Rockies In November 2008,
2008 the Overland
Pass Pipeline was placed into service, bringing 140,000 bpd of eastern Rockies capacity
online (expandable to 255,000 bpd).
46
Conway to Belvieu The End of a Differential?

Differentials are valuable things, and companies will fight to control them
sometimes at the expense of the differential.
For the past two years,
years the pipeline capacity from Conway to Mont Belvieu
failed to keep pace with the demand for transportation to high-value Gulf Coast
markets.
Theres
There s no better cure for an arbitrage than an arbitrage ONEOK, who has
historically provided all takeaway capacity from Conway to Belvieu, allowed
the spread to widen, thereby forcing Midcon and Rockies NGL producers
without additional transport capacity to MB to take a discount on NGL sales.
In June 2011, DCP Midstream (private SE/COP JV) announced that they would
be purchasing COPs Seaway Products pipeline from Cushing to Houston,
extending it to Conway and converting it to 150 kbpd of NGL service. This is
timed to be in-service byy 2Q
Q 2013,, before ONEOK completes
p
a 193-kbpd
p
expansion of their Conway-Belvieu Sterling system (see details later in report).
It is likely that ONEOK and DCP fill capacity on both pipelines, but the golden
goose the spread from Conway to Belvieu, will be diminished by a corridor
with multiple pipeline operators competing for volumes.
47
Intermediating the Seasonality of Supply and Demand
STORAGE OPPORTUNITIES
48
Gas Storage: A Quick Primer

The need for gas storage is a result of the simple fact that demand is seasonal and supply is not
As shown in the illustration below, in the Northeast, winter demand often exceeds the amount of daily
available gas (by as much as 10 bcf/d), necessitating that withdrawals from storage compensate for the
shortfall
Holders of storage make money by injecting gas into storage during the summer season roughly April
through October and then agreeing to sell that gas in the winter. The futures market places a premium
on winter gas based on perceived concerns about a supply shortfall (premiums have fallen see next pg)
Peak Demand
23.0
NE Gas Dem
mand (bcf/d)
21.0
6.5 bcf/d shown in illustration based

on monthly averages; actual daily
peak several bcf/d higher
19.0
17.0
15.0
Withdrawal
Injection
13.0
Production near storage locations

effectively lifts this red bar,
reducing need for storage
Shoulder Season
11.0
9.0
7.0
50
5.0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: EIA, TPH estimates
Dispersion of Monthly Average NE Gas Demand, 2000-10

Historical Monthly Demand (bcf/d)
Max. Pipe Capacity
Min. Storage Deliverability Needed
The development of unconventional shale gas resources drastically reduces exploration risk, to an extent
reducing the need for deliverability from storage. It is not uncommon to hear producers say that the
the
reservoir now serves as storage, due to the low geologic risk associated with incremental production
49
Gas Storage: A Casualty of Conventional Wisdom

During the 2000s, gas storage construction was overbuilt in the Southeast and
Northeast, driven by the same (ultimately incorrect) macro forecast as gas
pipelines:
Dependence
D
d
on iimported
d LNG expected
d to reduce
d
the
h consistency
i
off gas
supplies, increase storage demand
Declining domestic supply, increasing power gen and industrial demand
would require greater gas deliverability from storage
Increasing dependence on offshore gas would make supply vulnerable to
weather-related disruptions
The Golden Goose May Rise Again, but Hes Dead for Now
$5
then storage buildout,

shale, recession reduced
seasonal spread
$
$/mcf
$4
500
400
$3
300
$2
200
$1
100
$0
0
-100
-$1
1/1/00
1/1/02
1/1/04
6 Mo. Fwd. Sale Margin
1/1/06
1/1/08
1/1/10
Gulf Coast/NE Sttorage Capacity
Projects have Been Focused on NE/SE

Where Shale Production has Exploded
Avg. 6 Mo Fwd Sale Margin
Source: EIA, Bloomberg
50
Gas Storage Declining Fees, Increasing Capacity

Were Not Seeing a Bottom: new gas storage facilities are predominantly highdeliverability salt-dome caverns, which can deliver gas 7x-10x faster than depleted
reservoir storage.
Industry sources indicate that new projects since 2005 have increased storage capacity
by 14%, and deliverability by 44%
Lease fees for high-deliverability capacity have declined from approximately $0.25 to
as low as $0.12 per month per mcf
Despite bearish fundamentals,
fundamentals the market for high-spec
high spec assets has been soaring
3 high deliverability salt-dome assets on the Gulf Coast sold in 2010, at valuations that
are difficult to square in the current low and declining storage lease rate environment
Acquisition
Acquiror
Bobcat
Spectra
Tres Palacios
Inergy
Southern Pines
Plains
Expansion
Bobcat Expansion
Tres Palacios Ph. 3 & 4
Southern Pines Expansion
All-In Costs
Bobcat
Tres Palacios
Southern Pines
Date Annc.
7/15/10
9/7/10
12/29/10
In-service
2015
2013
2012
Cost ($mm)
$540.0
$725 0
$725.0
$750.0
Cost ($mm)
$425.0
$85.5
$50.0
Cost ($mm)
$965.0
$810.5
$800.0
Capacity (bcf)
18.0
27 1
27.1
18.0
Capacity (bcf)
28.0
20.9
23.0
Capacity (bcf)
46.0
47.9
41.0
$/bcf
TPHe EV/EBITDA
$30.00
12.50x
$26 80
$26.80
12 41x
12.41x
$41.67
17.36x
$/bcf
TPHe EV/EBITDA
$15.18
8.43x
$8.69
2.63x
$2.17
1.17x
$/bcf
TPHe EV/EBITDA
$20.98
11.65x
$16.92
10.85x
$19.51
10.49x
In each case, cheap expansion capacity was cited in each case as major motivation
behind the deal when incremental high-deliverability capacity is so cheap, it makes it
h d tto see th
hard
the b
bottom
tt
off th
the market
k t
Source: public filings, company presentations, TPH Estimates
51
Crude/Refined Products Storage

Regulatory mandates and unconventional resource development have
contributed to changes in supply/demand dynamics that are creating
opportunities in crude and refined product terminals
Crude:
Canadian oil sands and Bakken light crude production have created an
oversupplied situation at Cushing
Oversupply has forced the market into contango,
contango incentivizing storage of
crude. Typically, contango is caused by anticipation of future demand; this
contango market is caused by extraordinary pressure on the front of the
futures curve
We do not believe that the volume of new storage capacity is justified by
long-term throughput at Cushing
Refined products:
Refiners increasing ability to process bottom of the barrel crudes into
li ht products
lighter
d t h
have reduced
d
d supply
l off di
dirty
t products,
d t while
hil regulations
l ti
and
d
low natural gas prices have decreased domestic demand for dirty products.
Despite the diminishing market size, increasing exports out of the US and
decreased availability of dirty products have given providers of storage,
blending and marketing services opportunity to grow their business.
business
52
Cushing Storage and the Contango Market

Contango describes a state of the futures market when near-term prices are
lower than vs. longer-term prices
g can exist due to seasonal demand p
patterns,, but it can can exist also
Contango
when there is insufficient capacity to handle deliveries
An admittedly simplistic example to help think about Cushing:
Grills in January at Home Depot are in contango. HD is paying you to take
the grill away and store it in the garage.
You would pay full price if you bought in June. Depending on your familys
discount rate and the amount of junk in the garage, this may or may not
be attractive. This is a normal contango market.
At Cushing,
g, its like the Home Depot
p is g
getting
g truckloads of g
grills everyy
day, and they are forced to drop the price just to keep inventories from
overwhelming the store.
HD has started building new square footage so that they can inventory
more grills.
Even
E
granting
ti that
th t customers
t
now thi
think
k off thi
this HD llocation
ti as a
grill
ill
superstore; its still obvious that this is not a sustainable solution.
Bottom line: More storage at Cushing is not the solution; the market needs
pipeline offtake to structurally narrow the arbitrage
53
Cushing Storage Set to Grow Rapidly in 2011

Cushing Contango is a Result of
Insufficient Pipeline Takeaway; Market
Incentivizes Storage, but May Not
R fl t Long-term
Reflect
L gt
N
Need
d ffor St
Storage
g
Storage Buildout Serves as a Stop-gap

Until Pipelines Arrive; Once Cushing
Takeaway Expands, Storage will
P b bl Be
Probably
B in
i S
Surplus
l
70.0
10%
60.0
Barrels of Working Storage Capac
city
8%
6%
4%
2%
0%
-2%
2005
8.5
50.0
40.0
5.4
2.6
4.1
5.6
30 0
30.0
20.0
6.5
5.4
2.6
4.1
5.6
7.6
2.6
4.1
5.6
9.3
9.3
9.3
2.6
4.1
2.6
2
6
5.8
2.6
2
6
5.8
2.6
2
6
5.8
5.6
5.6
5.6
5.6
5.6
10.0
10.0
10.0
10.0
10.0
15.8
15.8
15.8
15.8
15.8
8.5
8.5
2.6
4.1
88
8.8
12.2
12.6
14.2
12.3
12.3
12.3
14 8
14.8
14 8
14.8
14 8
14.8
14 8
14.8
14 8
14.8
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
PAA
MMP
Vit l
Vitol
10.0
0.0
2006
2007
2009
CL3-CL1
Average Contango 2005-2008
Average Contango 2009-2011
2010
EEP
S
Semgroup
E t
Enterprise
i
Oth
Others
54
Crude Terminal Opportunities Outside of Cushing

Rapidly increasing Eagle Ford light crude production has created another
dynamic that has upended industry expectations
Early 2000s forecasts predicted scarcity of light,
light sweet crude grades
Gulf Coast refiners spent billions through the 1990s and 2000s becoming,
on average, the USs highest complexity refineries, capable of handling
the worlds heaviest and sourest crudes
TPH estimates that Eagle Ford crude production will increase to nearly 900
kbpd by 2016
Mostly high gravity crude (~API 50), not optimal for the heavy sour
slates of Gulf Coast refineries
Although Flint Hills (Koch), Valero and NuStar have announced plans to
refine some of this new crude supply, we expect that much of this highvalue crude will be exported or blended into heavier crudes in Houston
and Louisiana as the US imports cheaper, heavier crudes for refining
Midstream operators with marine terminals along the Gulf Coast from
Corpus Christi (MMP 1-2 mmbbls, NS 1.6 mmbbls, PAA 1.5 mmbbls
planned 4Q 2012) are well-positioned to capitalize on this emerging
waterborne crude trade
55
Refined Products: Exporting the Bottom of the Barrel

Large refineries have reduced bottom of the barrel output by building cokers to produce
higher-value light refined products from heavy crude. Refiners are selling associated heavy
product storage facilities, providing M&A opportunities for smaller midstream operators.
Heavy
H
terminal
i l transactions
i
completed
l d on the
h G
Gulf
lf C
Coast iin the
h past 18 months:
h
1.8 mmbbls of storage in Mobile, Alabama purchased by NS in May 2010 for $25/bbl
544 mbbls of storage in Channelview, Texas bought by NGLS in March 2011 for $50/bbl
New 7.8-mmbbl
7 8-mmbbl terminal on Houston Ship Channel announced
announced, operational 1H 2013
The withdrawal of refiners from the storage market presents opportunities for independent
storage providers and marketers NS and GEL are active marketers with terminal
operations. NGLS is evaluating heavy product terminalling as a potential business segment.
Thousand Barre
els per Day
US Residual Production by Grade vs. Net US Imports

1000
500
0
(500)
(1000)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
<0.31% Sulfur
0.31%-1% Sulfur
>1% Sulfur
Net Imports 6 Mo. Trailing Avg
Source: EIA
56
Profiting from the Dry Gas Price Dislocation
NGL OPPORTUNITIES
57
North America Moves Down the Energy Dispatch Curve

The unconventional resource revolution has transformed the North American gas
market. Even if the US has not yet figured out how to fully capitalize on our novel
position as a low-cost energy supplier (as evidenced by overflowing gas storage, shale
moratoria,, and other head-scratchers),
), the changes
g it has brought
g and will bring
g to
our economy are profound.
The good news is that North American midstream operators are uniquely positioned
to benefit from a wide array of these changes.
We believe that the true game-changing opportunity for the midstream industry
is the price dislocation between wet and dry BTUs of energy
Nat Gas and NGL Prices per BTU
120%
100%
Costt reduction
C
d ti off
lighter NGLs driven
by gas supply
80%
60%
40%
20%
0%
Natural
Gas
Ethane
Propane
2000-2007
Source: Bloomberg, EIA
Most Pressure on Light NGLs: NonBlendstocks with Limited Trade

As % of US Production
As % of W
WTI Price per BTU
U
140%
Butane
2010-2011
Isobutane Natural
Gasoline
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
86%
64%
61%
0% 0% 0%
11%
1% 0%
Ethane
Propane
Imports, 2000-2009
Used as Refining Blends
12%
-3%
Butane
9% 5%
6%
-4%
Natural
Gasoline
Imports, 2010-2011 YTD
Isobutane
58
NGL Primer: How Do NGL Recoveries Affect Netbacks?

Basins are like a box of chocolates, so theres no rule of thumb for netbacks. US
average is 2 gallons per mcf (GPM). Gas associated with oil production can be
10 GPM, increasing netbacks by >100% vs. selling the gas at its dry gas value.
"Average"" A
"A
American
i
M
Mcff off G
Gas
From the wellhead
1.123 mmbtu of gas
Processed Components
1.000 mmbtu of dry gas
0.123 mmbtus of NGLs
1.410 gallons of NGLs
0.601 gallon of ethane
0.399 gallon of propane
0.103 gallon of butane
0.127 gallon of isobutane
0.180 gallon of natural gasoline
Total Netback for Gas and NGLs
Increased Netback Under Current Pricing
P i
Price
Eagle Ford "NGL Window" Gas

From the wellhead
1.386 mmbtu of gas
Processed Components
1.000 mmbtu of dry gas
0 386 mmbtus
0.386
b
off NGLs
NGL
4.500 gallons of NGLs
2.295 gallon of ethane
0.945 gallon of propane
0.315 gallon of butane
0.315 gallon of isobutane
0 630 gallon of natural gasoline
0.630
Total Netback for Gas and NGLs
Increased Netback Under Current Pricing
Price
N tb k
Netback
$4.32
$4.85
$4.32
$4.32
$0.75
$1.52
$1.73
$1.97
$2.45
$0.45
$0.61
$0.18
$0.25
$0.44
$6.24
28.7%
% of NGL Bbl
42.7%
28.3%
7.3%
9.0%
12.7%
100.0%
$ per mmbtu
$10.20
$16.60
$16.75
$20.82
$22.30
% of NGL Bbl
51.0%
21.0%
7.0%
7.0%
14 0%
14.0%
100.0%
$ per mmbtu
$10.20
$16.60
$16.75
$20.82
$22 30
$22.30
Netback
$4.32
$5.99
$4.32
$4.32
$0.75
$1.52
$1.73
$1.97
$2 45
$2.45
$1.72
$1.43
$0.54
$0.62
$1 55
$1.55
$10.18
70.0%
Source: EIA, company press releases, TPH estimates

59
Wet Shale Gas: Game-Changing for the American Economy

The unconventional resource revolution has transformed the North American
gas market. Even if the US has not yet figured out how to fully capitalize on the
novel position of being a low-cost energy supplier (as evidenced by overflowing
gas storage,
storage shale moratoria,
moratoria and other head-scratchers)
head scratchers), the changes it has
wrought in our economy are profound
Oil and gas are not directly fungible (i.e., a gasoline-powered car cannot run on
natural gas), which is the main reason for the price disparity between the two.
Th
There
are ways tto substitute
b tit t llower-costt gas b
byproducts
d t ffor hi
higher-cost
h
t oil
il
byproducts, effectively increasing the demand for wet gas:
Ethylene, the most widely produced plastic feedstock, can be produced from
ethane or propane, or from crude byproducts like naphtha and gas oil,
allowing
ll i petrochemical
h i l companies
i to exploit
l i the
h llow price
i off gas
Knock-on economic effects include the effective export of BTUs of gas in
the form of plastics (polyethylene and polyethylene derivatives)
p
has transportation
p
and heating
g applications.
pp
The US, once an
Propane
importer of propane, now exports propane, taking advantage of demand in
developing markets that are transitioning away from open flame cooking and
heating.
Cheap natural gas is driving the obsolescence of residual fuel oil power
generation in certain US markets (primarily East Coast).
60
Eagle Ford: The Tidal Wave of NGLs Needs Processing

The Eagle Ford is an area with emerging
gathering/processing bottlenecks current
processing capacity handles >4bcf/d of gas, and
produces >200 kbpd of NGLs (much drier average
than Eagle Ford gas)
Eagle Ford Processing
Bottlenecks have developed due to the drilling

pace outstripping the pipe-laying pace, this is a
temporary phenomenon that should be sorted out
b llate 2011
by
2011.
ETP
1Q 2013
64.3
CPNO
1Q 2013
42.9
Announced NGL Production Capacity
277.0
Eagle Ford, Granite Wash and the Permian have

substantial processing facilities, which are wellpositioned to handle unconventional volumes.
Eagle Ford, located in S. TX with substantial legacy dry
gas production, has major gas processing capacity
needs for 380 kbpd of Eagle Ford NGLs by 2016 (TPHe).
In addition to existing underutilized capacity from DCP

and EPD, processors have announced another 2.5 bcf/d
of processing capacity, and 600 mmcf/d of expansions
have been announced.
announced
We do not believe that major processing bottlenecks

will arise, as announced additions can handle the vast
majority of estimated peak NGL production.
CPNO/KMP - Formosa
TPH est. NGL Prod. Capacity (kbpd)

Currently
21.4
CPNO/KMP - WPZ
3Q 2011
10.7
Southcross
2Q 2012
25.2
EPD
2Q 2012
64.3
DCP Midstream
3Q 2012
48.2
Announced Potential Expansions

CPNO/KMP
2014+
10.7
ETP
2014+
21.4
EPD
2014+
32.1
Annc. Potential NGL Prod. Capacity

Total Potential NGL Prod. Capacity
64.3
341.3
Source: Company press releases, Oil & Gas Journal,

SEC filings, TPH estimates
Processing (extraction from dry gas stream)

capacity is manageable; its fractionation
(separating raw NGLs into purity products) that we
believe will drive more Eagle Ford spending
We do not believe that significant new processing
providers will enter the Eagle Ford, as currently
p
y will be able to handle
firm,, announced capacity
~70% of TPHe maximum NGL production
61
Marcellus Field Gathering - Still A Competitive Landscape

We believe the Marcellus competitive environment is more fluid than that in the Eagle Ford, Granite Wash and Permian
Basin, with less dominant midstream players and more opportunities for M&A
WPZs Marcellus exposure has expanded from a JV with a small-cap midstream company in mid-2010 to now emerging as
the largest gas gatherer in the Marcellus with two systems, serving COG and CVX/RIL, among others
SSmall
ll g
gatherers
th
h
have staked
t k d outt ffootholds
th ld iin M
Marcellus.
ll
P
Private
i t operators
t
lik
like C
Caiman
i
(g
(gathering/processing)
th i g/
i g) and
d
Momentum (gathering) have entered the Marcellus, possibly offering opportunities for larger players to buy in
DCP, one of the largest processors in the US, has indicated an interest in becoming involved in the Marcellus
Major producers APC/UPL, XCO/BG - are providing their own midstream services. Smaller producers - REXX, MHR providing
p
g their own services. This could p
provide M&A opportunities
pp
as bottlenecks ease and E&Ps monetize non-E&P assets
Release Date Producer
Geography
Gatherer
Processor
CHK/STL
Marshall/Wetzel Co, WV
NI - Columbia Gas
MWE JV - Majorsville, WV Plant
CVX/Reliance
SE PA; Dry Gas
Laurel Mtn (CVX/WPZ JV)
na
RRC
Lycoming/Tioga Co, NE PA
PVR
na
C /S / C
CHK/STL/RRC
Wet Marcellus
na
MWE JV - Houston, PA Plant
COG
NE PA
WPZ
na
1/11/2011
CHK/STL
N. WV
na
MWE JV - Majorsville, WV Plant
1/26/2011
Chief/CHK/GST/SGY/Others Marshall/Wetzel Co, WV
Caiman
Caiman's Cameron, WV Plant
9/15/2009
2009
3/10/2010
6/1/2010
/ /
11/18/2010
Announced Processing Capacity
Facility
mmcf/d
Announced Marcellus Frac. Capacity Facility
2010
MWE JV
SW PA and
SW.
d N.
N WV
290 0
290.0
2011
2011
MWE JV
SW. PA and N. WV
335.0
4Q 2011
2011
Caiman
Ft. Beeler, Cameron, WV
320.0
2012
Wetzel, WV Plant
300.0
2012
Caiman
Ft. Beeler, Cameron, WV
200.0
4Q 2013E
2012
MWE JV
SW PA and N
SW.
N. WV
320 0
320.0
4Q 2013
2013+
MWE
SW. PA and N. WV
455.0
Potential Processing Total:

Note: all Houston frac trains can be upgraded to recover ethane as needed
Source: company press releases, filings, TPH estimates
kbpd
MWE
H
Houston
t Frac.
F
(Propane+)
(P
)
42 0
42.0
Caiman
Ft. Beeler Frac.
12.5
2012
MWE
Houston Frac. (Propane+)
18.0
2013E
MWE
Houston Frac. (Ethane+)
75.0
Caiman
Ft. Beeler Frac. Exp.
25.0
Marshall County
County, WV
32 0
32.0
Total Potential Fractionation Capacity:
204.5
2,220.0
62
DJ Basin Processing and NGL Takeaway

There is plenty of gas takeaway capacity in the DJ basin; however, the bottleneck is processing
capacity. Due to richness of gas in the basin (~4 GPM) production is constrained by processing. Due to recent
buildouts natural gas takeaway is not an issue, however, rich gas is hard to flare and processing is tight.
In our view, processing infrastructure will eventually be necessary and is at least one year out. Processing
capacity
it is
i dominated
d i t d by
b Anadarko
A d k Petroleum
P t l
and
d DCP Midstream.
Mid t
IIn M
March
h 2011
2011, APC purchased
h d BP
BPs
Wattenberg processing plant, consolidating 195mmcf/d of processing capacity.
Near-term, raw NGL export capacity should be adequate relative to processing capacity. Current 77mbpd
total NGL takeaway capacity vs. ~750mmcf/d of processing implies a capacity ratio of 3.9 GPM. We believe that
incremental takeaway will be accommodated by the planned expansion of Overland Pass pipeline (additional
p , with 60mbpd
p earmarked for Bakken and the remaining
g 55mbpd
p available for Rockies NGLs).
)
115kbpd,
Processing Capacity
Facility
mmcf/d
Online
APC/WES
Wattenberg (fmr. BP), Ft. Lupton, Platte Valley (fmr. ECA)
385.0
Online
DCP Midstream (DPM)
Eaton, Greeley, Mewbourn, Platteville, Roggen, Spindle, Lucerne
400.0
Online
Other
Various <20mmcf/d plants
48.0
C
Current
t Processing
P
i T
Total:
t l
Potential Expansions
833 0
833.0
Facility
mmcf/d
3Q 2011 APC/WES
Ft. Lupton (expansion underway to existing plant)
2Q 2013 DCP Midstream LLC
La Salle (announced new plant and gathering system)
2013
APC/WES
Ft. Lupton (potential expansion to existing plant)
Potentiall Processing Total:

l
Pipeline Capacity
Pipeline
kbpd
DCP Midstream Partners
Wattenberg
22.0
Online
Overland Pass Pipeline (OKS-WMB JV)
DJ Basin Lateral
55.0
Current Takeaway:
2013
Overland Pass Pipeline (OKS-WMB JV)
Potential NGL Takeway Capacity
110.0
40.0
998.0
Online
Pipeline Capacity
15.0
77 0
77.0
Pipeline
kbpd
DJ Basin Lateral
55.0
132.0
Marcellus/Bakken NGLs: Further Afield

The end market for Bakken NGLs remains to be seen:
We believe that Bakken ethane will receive the best netback in Alberta, Canada
(proposed Vantage/HES purity line will send 60 kbpd to NOVA)
OKS will provide a 60 kbpd NGL line to Conway, which we believe will ship
heavier NGLs to larger refining/NGL consumption markets.
End market for Marcellus ethane is also a subject of debate:
We believe that Shells recent announcement of plans to build a Marcellus-area
cracker will effectively prevent Marcellus ethane from reaching the Gulf Coast or
being blended into pipelines over the long term.
Cracker will likely require up to 70 kbpd of ethane capacity (no timing
announced we estimate 2015
announced,
2015-16).
16) Shell will have to provide ethane
storage/contracted pricing to persuade Marcellus producers that local ethane
prices will not be wildly volatile without a Gulf Coast outlet.
The local geology does not support salt dome storage, so we expect that
high-cost,
g
, above-ground
g
bullet tanks mayy be necessary.
y
Alternatively, it is possible that southern NY gas storage may be converted
to hold ethane and ethylene, as gas storage demand has been and will be
diminished by Marcellus production.
Remaining 30-50 kbpd of 2015E Marcellus ethane will be sent to Sarnia, Ontario
petrochemical
t h i l plants
l t (C
(Caiman-NOVA
i
NOVA MOU announced
d MOU ffor 20 kbpd).
kb d)
64
NGL Supply Driving Billions in Petchem Investment

In December 2010 and subsequently in April 2011, Dow Chemical, the
2nd largest ethylene producer in the US (7.7 bn lbs/yr, 13.4% of US),
announced plans to increase ethane consumption in North America
Restarting ethylene cracker at St. Charles, LA by YE 2012
Improving ethane capacity at Plaquemine, LA in 2014, Freeport, TX in 2016
Building new ethylene cracker on Gulf Coast by 2017
Potential newbuild crackers (worldscale facilities produce >2.2 bn

lbs/year, and can consume up to 70 kbpd of ethane):
ChevronPhillips - feasibility study announced March 2011 for potential 2014-15
construction
LyondellBasell announced interest in potential ethylene JV
Shell plans to build worldscale Marcellus cracker, location and timeframe undisclosed
Smaller expansions announced:

Formosa expanding ethylene production in S. TX
Westlake expanding ethane consumption in Louisiana and Kentucky
INEOS studying debottleneck of existing cracker in Texas
65
US Ethane Demand Set to Increase by Up to 40% by 2017

Timing
Current Ethylene TPHe Add'l Ethane

Prod (mmlbs/yr) Consumption (kbpd)
Dow Announcements - December 2010 and April 2011

Increasing Total Ethane by 20%-30% (Dec 2010 annc.)
2011-13
St Charles Flexi (<50% ethane currently)*
St.
currently)
End 2012
Plaquemine E/P (50-90% ethane currently)
2014
Freeport 2 Flexi (<50% ethane currently)
2017
Potential Newbuild GC Ethylene Cracker
2017
Total from Dow Announcements
Potential Expansions
ChevronPhillips Port Arthur - 55 mm lb/yr debottlenecking
2011-12E
2011
12E
Westlake - phase 1 ethane increase at Lake Charles
2012
Westlake - phase 2 ethane increase at Lake Charles
2014E
Westlake - evaluating ethane feedstocks in Kentucky
2013-14E
Formosa - 1bn lb/yr expansion under consideration
2015E
INEOS - 250 mm lb/yr debottlnecking under study
2014E
Total from Expansion Projects
Potential Newbuild Crackers
Chevron Phillips - Gulf Coast feasibility study by YE 2011
2014-15E
Shell Marcellus Cracker - announced, no details yet
2014-16E
LyondellBasell - JV under consideration
2015-17E
Total from Potential Newbuilds
Estimated Consumption from High Likelihood Projects
Estimated Consumption from High Likelihood Projects on Gulf Coast
Total Estimated Consumption, Including Lower Likelihood Projects
*Included in 20%-30% expansion of GC ethane crack ing shown on top line
TPH Est. of
Likelihood
7,749
1 349
1,349
2,700
2,200
0
35,000
8 000
8,000
8,000
12,000
60,000
115,000
High
High
High
High
Moderate
1 825
1,825
2,400
2,400
430
3,300
1,825
5 000
5,000
10,000
7,000
6,000
23,000
10,000
61 000
61,000
High
High
Moderate
Moderate
High
Moderate
0
0
0
60,000
60,000
60,000
180,000
213,000
153,000
356,000
High
High
50/50
Sources: Company press releases and presentations, TPH estimates
66
The Gulf Coast is Currently Short Ethane

Recent US demand for ethane has averaged 975 kbpd vs. production of roughly
925 kbpd, leaving the US approximately ~50 kbpd short
Conway Hub
520 kbpd
NGL Pipelines
Pi li
into
i t Gulf
G lf Coast
C
t
Line EZ
W. TX LPG
W. TX NGL
Arbuckle
Sterling I and II
Skelly Belvieu
Skelly-Belvieu
Seminole
Chapparal
Total Inbound NGL Capacity
LA Gulf
Mont Belvieu
SE TX
370 kbpd
880 kbpd
480 kbpd
kbpd
kb
d
101.0
230.0
144.0
180.0
300.0
27 0
27.0
250.0
135.0
1,367.0
Raw/Purity
R
/P it
Y-Grade
Y-Grade
Y-Grade
Y-Grade
Purity
Y Grade
Y-Grade
Y-Grade
Y-Grade
Gulf Coast Fractionation Capacity

kbpd
EPD Mont Belvieu Fractionator
305 0
305.0
NGLS Cedar Bayou Fractionator
293.0
OKS MB-1 Fractionator
160.0
COP Gulf Coast Fractionator
102.0
Mont Belvieu
860.0
Copano HCPP
22.0
EPD Armstrong and Shoup
97 0
97.0
Formosa
40.0
Other
210.0
South Texas
369.0
Louisiana Gulf Coast
477.0
Total Gulf Coast Capacity
1,706.0
Est. Max Ethane Production*
Production
911.5
*Includes frac capacity + purity prods from Sterling
67
Paving the NGL Highway to the Gulf Coast

NGL pipeline and fractionation projects have been announced at a breakneck pace in 2011.
Fractionation currently lags pipeline capacity. NGLs from the Eagle Ford could add another
Future Pipes to GC
Timing
kbpd
Raw/Purity
390 kbpd requiring fractionation by 2016.
C
Conway
H
Hub
b
520 kbpd
60 kbpd
Mont Belvieu
SE TX
390 kbpd
bpd
Sterling I
2Q 2011
MAPL
3Q
Q 2012
Arbuckle
2Q 2012
Lone Star
1Q 2013
Sandhills
2Q 2013
Southern Hills
2Q 2013
Mariner East
2013-14
MEPS
2013-14
Sterling III
4Q 2013
MAPL/Seminole
3Q 2014
Total Inbound NGL Capacity
High Likelihood NGL Capacity
LA Gulf
480 kbpd
880 kbpd
470 kbpd
p
132 kbpd
15.0
15.0
75.0
130.0
130.0
150.0
50.0
60.0
193.0
50.0
868.0
758.0
Likelihood
Purity
High
Y-Grade
High
g
Y-Grade
High
Y-Grade
High
Y-Grade
High
Y-Grade
High
Purity
Low
Purity
Low
Both
High
Y-Grade
High
63.5% increase
55.4% increase
Fractionation Adds
Timing kbpd
EPD Phase V
1Q 2012
75 0
75.0
GCF Expansion
2Q 2012
43.0
Lone Star JV
1Q 2013 100.0
MB2
1Q 2013
75.0
Cedar Bayou
2Q 2013 100.0
MB2 Expansion
4Q 2013
50.0
EPD Phase VI
2013
75.0
Mont Belvieu
518.0
Copano HCPP
4Q 2011
22.0
Formosa - Pt. Comfort
1Q 2013
35.0
Oxy - Ingleside
2013
75.0
South Texas
132.0
Total Gulf Coast Expansions 650.0
High Likelihood Expansions 575.0
Add'l Ethane Production*
266.7
Likelihood
High
High
High
High
High
High
High
g
60.2% increase
High
High
Moderate
35.8% increase
38.1% increase
33.7% increase
28.8% increase
Note(*): Max Gulf Coast ethane supply increased by 60 kbpd Bushton frac expansion
68
Announcements Indicate Possible Softness in Ethane in 2013

Announcements have been issued at a pace that makes forecasting supply/demand
dynamics difficult; however, announcements of incremental ethane supplies have
clearlyy outpaced
p
announced demand from p
petrochems
The graph below does not consider any potential demand from unannounced
petrochemical cracker turnarounds; industry sources indicate that these could add
well over 100 kbpd of incremental ethane demand
C
Current
t Forecasted
F
t d Ethane
Eth
S
Supply-Demand
l D
dB
Balance,
l
B
Based
d on A
Announced
dP
Projects
j t
Supply of MB Eth
hane, kbpd
400
300
200
100
0
-100
-200
-300
-400
2Q 2011
2Q 2012
2Q 2013
2Q 2014
2Q 2015
MB Fractionation
Announced Purity Pipeline into MB
Potential Newbuild TX Crackers
DOW Cracker Expansions
p
WLK Cracker Expansions
ChevronPhillips Cracker Expansions
Current Projected Ethane Supply/(Deficit)
2Q 2016
2Q 2017
Ethane from Raw NGL Pipelines
Formosa Cracker Expansions
p
INEOS Potential Cracker Expansion
Source: company press releases, presentations, TPH estimates

69
More American LPGs Will Be Consumed Overseas

Potential fractionation overbuild will likely put some pressure on ethane. Longer-term, we
believe ethane is going to have a long-term advantage as a petrochemical feedstock due to
North American shale gas supplies.
Other products should weather ethane oversupply due to the industrys growing ability to
export LPGs (propane and butane).
EPD announced plans in March 2011 to double their LPG export capacity (already the
largest in North America) to roughly 150 kbpd to accommodate the excess NGLs that will
result from the coming wave of NGLs.
NGLs
We believe that NGLS, the owner of the second-largest LPG export facility, will upgrade
dock facilities (the 2nd-largest in North America) to export higher-quality (international
grade) propane from Houston from approximately 60 kbpd to up to 125 kbpd.
Thousand B
Barrels/Day
US LPG Exports
E
t and
dN
Nett E
Exports
t
150
100
50
0
50
-50
-100
-150
-200
-250
1981
1983
1985
1987
Propane Exports
1989
1991
1993
Butane Exports
1995
1997
1999
Net Propane Exports
2001
2003
2005
2007
2009
Net Butane Exports
Source: EIA
70
Analyst Certification:
I, Bradley Olsen, do hereby certify that, to the best of my knowledge, the views
and opinions in this research report accurately reflect my personal views about
the company and its securities. I have not nor will not receive direct or
indirect compensation
p
in return for expressing
p
g specific
p
recommendations or
viewpoints in this report.
Important Disclosure:
The analyst above (or a member of his household) has a long stock position in
Energy Transfer Equity LP, Inergy LP, Regency Energy Partners, Teekay
Corporation, Teekay LNG Partners, and Teekay Offshore Partners.
R ti
Ratings:
B = buy,
b
A = accumulate,
l t H = hold,
h ld T = ttrim,
i
S = sell,
ll NR = nott rated
t d
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Josh Martin
713.333.2982
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Paige Penchas
713.333.2969
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Eric Cooper
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Michael du Vigneaud
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Scott McGarvey
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Seth Williams
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*London
Jon Mellberg
+44 20 3008 6430
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Win Oberlin
+44 20 3008 6431
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Jonathan Wright
+44 20 3008 6436
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DEBT SALES & TRADING

Clay Border
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*London- E&P
Anish Kapadia
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*Office of Tudor, Pickering, Holt & Co. International, LLP.

Anish Kapadia is employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and is not registered/qualified as a research analyst with FINRA. Mr. Kapadia is not an
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TPH Midstream Primer

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TPH Midstream Primer

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Bradleyy Olsen

Differentials and Differentiation

Whats in This Report

Implications of North America as low-cost supplier

Key Midstream Takeaways

Suddenly, buried steel is a lot more interesting

THE STATE OF THE INDUSTRY

Quite Simply: Its About Differentials

This Aint Your Parents Midstream Industry

The Midstream Value Chain

Generally less risky approaching

Correlations of Daily Returns to Gas

Midstream Businesses are NOT Toll Roads

But Midstream Businesses are Anchored by Stable Trends

Although we find the idea

RBOB/Diesel 2:1 Price Composite

Refined Products Consumption

Gas Transportation Performance

Source: Bloomberg & EIA

Returns Across the Value Chain Gas and NGLs

Gatherers or processors in supply

Dry gas can come from gathering;

Processing plants supply "Y-grade,"

Processing plants and long- Residue natural gas heads to

Gas is injected and withdrawn by

Local distribution companies, power Either pipeline, truck, or rail delivers

See "Transportation - NGL"

Ethane: ~100% petrochemical

Keep-whole: (long NGLs, short

Monthly fee, based on variables

Intrastate and interstate typically

Typically volumetric fee-based; "fracor-pay" contracts common in

Typically bundled service with

Regulated tariffs on interstates.

No exploration risk, but other

KW long NGL and short gas

Fees determined by seasonal

New pipes contracted with long

Fee-based facilities near demand

Storage services less valuable

Volumetric risks. For raw NGL

Fee-based contract is most

cases, gatherer can

Note: TPH estimates off target

Returns Across the Value Chain Petroleum

Storage - Crude Oil

Transportation - Crude Oil

Storage - Refined Products

Transport. - Refined Prods.

Ports, producing basins

Crude pipelines and terminals

End consumers via pipelines,

Terminals near demand centers,

Ultimate destination for crude is

Terminal storage hubs are an

Gathering most competitive,

Monthly fee, based bbls of

Regulated tariffs on interstates.

Monthly fee, based bbls of capacity,

Regulated tariffs on interstates.

Pipeline gathering exposed

On-site terminals at refineries

Pipes transporting out of crude

On-site terminals at refineries are