Jun 6, 2018, by David Wethe, Alex Nussbaum and Ryan Collins
More than $1 billion a day. That’s the price tag for a Permian Basin pipeline crunch that’s increasingly affecting investors as much as it is West Texas oil drillers.
Eight of the top explorers focused on the booming U.S. shale region have lost $15.6 billion in combined market value in about two weeks, as shipping constraints devour the profit they can fetch for a barrel of crude. Parsley Energy Inc. shares have wilted 16 percent in that time; Diamondback Energy Inc. has been defanged, down 18 percent.
Even as production soars, dwindling pipeline space and a rail and trucking shortage have raised shipping costs, boosting the discount Permian producers take to offload their oil. The bottleneck benefits refiners who can buy cheaper crude and pipeline owners with extra space, but it’s dragging down explorers.
“You just don’t want to touch these Permian names,” said Gabriele Sorbara, a Williams Capital Group analyst in New York. “They are falling off a cliff.”
Relief may not come until 2020, when new pipelines are expected to be up and running. For now, here’s a rundown of winners and losers amid the space crunch:
Being a “pure-play” shale producer, even a Permian stalwart, is no longer the ticket to success for energy equities.
Since May 21, the price of benchmark West Texas Intermediate crude has fallen about 10 percent and companies focused primarily on the Permian have been shunned. The hardest fall: Concho Resources Inc, which had lost $4.1 billion off its market capitalization as of Tuesday.
As of Wednesday, oil in Midland, Texas, was trading for about $19 a barrel below Brent crude, the global benchmark price.
Even Pioneer Natural Resources Co., with relatively strong finances and secure pipeline contracts, has been swept up, Williams Capital’s Sorbara said by telephone. It’s lost $3.2 billion in market value, or 9 percent, since May 21.
While the shortages are real, he deems much of the market selloff “overblown,” since even discounted Permian crude is selling for well above where many producers set their budgets earlier this year.
Investors, though, are fleeing to the relative safety of larger names with more diverse portfolios such as Occidental Petroleum Corp., whose shares are flat over the past couple weeks. The Permian’s biggest oil producer also pumps in the Middle East and Colombia, with roughly 40 percent of its output this year based on higher international crude pricing, Capital One Securities said in an analyst note.
The company also operates pipelines and a Gulf Coast export terminal that will benefit from cheaper U.S. crude prices. “The largest companies or companies with diverse portfolios can rotate capital around,” Sorbara said. “If you’re a pure play, the only thing you can do is step on the brakes.”
With bottlenecks between the Permian and major Gulf Coast refiners, operators in other parts of the country served by less congested pipelines have a relative advantage, analysts say.
That includes Delek US Holdings Inc., CVR Refining LP and HollyFrontier Corp. — with refineries in New Mexico, Arkansas and northeastern Texas, among other locations, according to Barclays Plc. Delek gets about 78 percent of its crude from the Permian, HollyFrontier gets 39 percent and CVR gets 14 percent, the bank said in a June 5 analyst report.
Delek shares have climbed 7.5 percent in the past two weeks while CVR is up 3.3 percent and HollyFrontier is up 1 percent.
“Simply put, we think U.S. refiners win big with lower input costs,” analysts including Justin Jenkins at Raymond James & Associates said in a June 4 note.
Enterprise Products Partners LP and Magellan Midstream Partners LP also stand to benefit from the blow out in Midland prices as they own crucial pipelines in the Permian and dock space on the Gulf used for exports — and have plans to add more.
“The very idea of congestion is beneficial,” said Sandy Fielden, director of oil research at Chicago-based Morningstar Inc. “If I’m going to pitch my new pipeline or expand my pipeline, and I’m going to hold my open season, I can expect to see a full crowd there anxious to sign up quickly.”
Enterprise started full service in April on its 416-mile Midland-to-Sealy pipeline, which can carry some 575,000 barrels per day of crude from the heart of the Permian to key export facilities in Houston. They also own the lion’s share of crude storage tanks and docks along the Gulf.
Magellan operates and owns part of the 400,000 barrel-a-day BridgeTex pipeline, transporting oil from the Permian to Corpus Christi, Texas. That route is scheduled for expansion in early 2019 because of added interest. The company said last month that almost all existing customers on its Longhorn pipeline, connecting the Permian to Houston, have renewed their contracts for two years.