$1 Billion a Day Bottleneck? | OutPut by Rig Lynx

More than $1 billion a day. That’s how much value a Permian Basin pipeline crunch wiped out from the explorers most focused on the booming U.S. shale region in two weeks.

Eight of the Permian’s so-called pure-play drillers lost $15.6 billion in combined market value in the 15 days through Tuesday, as shipping constraints devour the profit they can fetch for a barrel of crude. Parsley Energy Inc. shares wilted 16 percent in that time; Diamondback Energy Inc. has been defanged, down 18 percent.

As oil prices slumped over that span, their losses were far worse than declines for other producers — including more diversified shale drillers Occidental Petroleum Corp. and EOG Resources Inc., majors like Exxon Mobil Corp. and Chevron Corp., as well as the S&P 500 energy index. They pared those losses a bit on Thursday, along with other energy stocks, as oil rebounded.

Even as production soars in the Permian, dwindling pipeline space and a rail and trucking shortage have raised shipping costs, boosting the discount producers in the region 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.”

The group of eight explorers, which also includes Pioneer Natural Resources Co., Concho Resources Inc., Cimarex Energy Co., RSP Permian Inc., Energen Corp. and Laredo Petroleum Inc., are the most weighted to the Permian according to Bloomberg Intelligence.

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:

Permian Explorers

Being a pure-play Permian stalwart is no longer the ticket to success for energy equities.

The price of benchmark West Texas Intermediate crude fell about 10 percent in about two weeks before a slight rebound Thursday, and companies focused primarily on the Permian have been shunned. The hardest fall: Concho, which had lost $4.1 billion off its market capitalization as of Tuesday.

For a view on which Permian companies may be M&A targets, click here

As of Wednesday, oil in Midland, Texas, was trading for about $19 a barrel below Brent crude, the global benchmark price.

The Permian Blues

Even Pioneer, with relatively strong finances and secure pipeline contracts, has been swept up, Williams Capital’s Sorbara said by telephone. It lost $3.2 billion in market value, or 9 percent, in the 15 days through Tuesday.

While the shortages are real, Sorbara 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.

Diverse Portfolios

Investors, though, are fleeing to the relative safety of larger names with more diverse portfolios such as Occidental, whose shares are flat over the past couple weeks. The Permian’s biggest oil producer by acreage 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.”

Permian producers are able to protect themselves a bit against the discounts. They have about 226,000 barrels a day of second-quarter production covered by Midland-Cushing basis swaps at a price of about 74 cents per barrel, according to a June 4 report from Bloomberg New Energy Finance. Concho has the most production covered by swaps, while Pioneer has none, according to the report.

Inland Refiners

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.

Before Thursday’s oil rebound, Delek shares lost 7.5 percent in two weeks while CVR rose 3.3 percent and HollyFrontier gained 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.

Pipeline Demand

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.

— With assistance by Catherine Ngai

Original Article Here

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