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Permian woes drill stocks for Parsley, Pioneer, Concho
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Diverse drillers, refiners are beneficiaries in pipe shortage
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:
Permian Explorers
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.
Diverse Portfolios
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.”
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.
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.
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
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