Oil Boom Bottleneck Costs Permian Investors $1B a Day

Oil Boom Bottleneck Costs Permian Investors $1B a Day
More than $1B a day. That's how much value a Permian pipeline crunch wiped out from the explorers most focused on the booming shale region in two weeks.

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 from Catherine Ngai. To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Alex Nussbaum in New York at anussbaum1@bloomberg.net; Ryan Collins in Houston at rcollins74@bloomberg.net. To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net Carlos Caminada, Christine Buurma.


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