A widening spread: Crude transportation and logistics MLPs benefit

Market Realist

A wider Midland to Cushing oil discount: The effect on the market (Part 4 of 5)

(Continued from Part 3)

For midstream energy players engaged in pipeline supply of fossil oil, the supply demand dynamics play a major role in determining profitability. If capacity remains stagnant but supply rises, price will decline. So, the price differential between producer upstream companies referenced as WTI Midland oil price and WTI Cushing crude will widen, leading to lower revenues. Historically, Cushing was the midcontinent hub for distribution of both imported crude oil and West Texas crude oil production. Pipelines were built and configured to move that crude oil north to Cushing, and then on to refineries throughout the Midwest. The crude oil production growth in the U.S. midcontinent and Canada has caused the Cushing hub to become over-supplied.

We looked at how the midstream sector companies in this region are gearing up to profit from rising crude production in the Permian. In 2013, Plains All American (PAA) witnessed volume increase of 190,000 barrels per day on Permian Basin area pipelines. In its expansion projects in the Permian Basin, PAA plans to build a new 310-mile crude oil pipeline extending from McCamey to Gardendale, Texas to provide 200,000 barrels per day; a new 40-mile crude oil pipeline with 100,000 barrels per day of pipeline capacity from Monahans to Crane, Texas; a new 62-mile crude oil pipeline with 200,000 barrels of takeaway capacity from the South Midland Basin to the origin of the Cactus Pipeline at McCamey; and a new 80-mile crude oil pipeline between Midland and Colorado City, Texas that will provide an additional 250,000 barrels per day of capacity.

In 2014, the company expects an average capacity of 126 million barrels of oil equivalent per month, or approximately 5% over 2013. PAA expects to invest about $430 million in 2014 of which $290 million relates to trunk line projects. Its pipeline projects include a new 20-inch pipeline from Midland Colorado City, a line from Sprayberry to McCamey, a 12-inch line from Monahan Station to Crane, and a new 20-inch line from Jal to Hendricks, replacing the old pipeline. These lines are all expected to be in service in early 2015. Currently, PAA has assets in the Permian, specifically the Basin Pipeline system which connect Permian Crude (which would receive prices close to Midland) to Cushing (WTI-Cushing).

If the spread between Midland and Cushing widens, it could affect PAA in that there is an increased demand for PAA’s assets. Such price movements are also indicators that PAA could put in more assets there (and invest more in growth capex, and ultimately grow and generate returns for shareholders).

Magellan Midstream Partner (MMP) is constructing BridgeTex pipeline in collaboration with Occidental Petroleum, which is its largest construction project to date. It expects to begin initial line fill during the late second quarter of 2014 with the pipeline operational in mid-2014 to deliver crude oil from the Permian Basin to the Houston Gulf Coast area. BridgeTex will consist of a 400-mile pipeline capable of transporting 300,000 barrels per day of Permian Basin crude oil from Colorado City, Texas to our East Houston terminal, as well as combined operational crude oil storage at Colorado City.

MMP expects to spend a total capex of approximately $600 million on the pipeline. MMP’s Longhorn pipeline delivers Permian Basin production to trading and demand centers in the Houston area. MMP’s pipeline operation depends on the level of production in the Permian Basin. The demand for shipments to the Houston area is driven primarily by the utilization of the West Texas crude oil by the Gulf Coast refineries and the relative price movement of WTI-Cushing to oil price at the Gulf Coast.

Western Refining Logistics’ (WNRL) pipeline and gathering assets consist of approximately 300 miles of crude oil pipelines and gathering systems and approximately 569,000 barrels of active crude oil storage located primarily in the Delaware Basin in the Permian Basin area of west Texas and southern New Mexico. The Delaware Basin system is designed to handle up to 138,000 barrels per day. The company also owns crude gathering assets in west Texas with an aggregate capacity of approximately 8,000 barrels per day.

Note that midstream companies with crude transportation and logistics assets in the Permian may see more demand for their assets in times when spreads are widening, and wider spreads also give a market indication that there is more need for infrastructure in the area. This creates growth opportunities for companies positioned there.

Also, note that EPD and MMP are significant components of the AMLP ETF as well as the ENFR ETF.

Continue to Part 5

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