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Permian Pipeline Bottleneck to Ease: 4 Stocks in Spotlight

Nilanjan Banerjee

The Permian basin has been reshaping the energy market, making United States the largest oil producer in the world last year. Advanced technologies like hydraulic fracturing and horizontal drilling have made operations in the basin extremely cost effective.

However, the transportation capacity constraint has been preventing Permian oil producers from transporting mounting crude volumes to refineries and key markets. Although some pipeline projects have been a relief to the bottleneck problem, more pipelines are needed to carry the massive oil volumes that the prolific basin will be producing in the coming years.

Daily Permian Oil Volumes Top 4 Million Barrels

Per the U.S. Energy Information Administration (EIA), daily crude production volumes from Permian have already crossed 4 million barrels. This represents a massive increase from less than 1 million barrels a day production in 2010. Crucially, the prolific basin is contributing to more than 30% of total U.S. production and EIA expects Permian to witness growth of 40 thousand barrels a day production in April 2019 as compared to March 2019. EIA added in its short-term energy outlook that Permian will continue to contribute the maximum to U.S. oil production growth through 2019 and 2020.

The basin is likely to remain a major contributor to the country’s oil production growth story beyond 2020. This is reflected in the recent upward revision in production estimates by energy giants like Exxon Mobil Corporation XOM and Chevron Corporation CVX. ExxonMobil recently lifted its oil equivalent production estimate from Permian to more than 1 million barrels per day (MMBoE/D) from 600,000 MMBoE/D by 2024. Chevron has made an upward estimate revision to 900,000 barrels per day (B/D) in 2023 from its prior guidance of 650,000 B/D.

The revised estimates call for more oil production from the Permian than most OPEC countries.

Permian Needs More Pipelines to Support Huge Volumes  

To address the pipeline bottleneck problem in Permian, Plains All American Pipeline, L.P. PAA placed the expanded Sunrise Pipeline oil system in service late last year. The expanded network has been designed to carry oil at a rate of 500,000 B/D to the leading crude-storage hub in Cushing from Permian.

Another midstream service provider, Enterprise Products Partners L.P. EPD, commenced Permian oil transportation after converting a natural gas liquids (NGL) pipeline to crude ahead of scheduled time. Notably, the Seminole-Red line has the capacity to transport crude from Permian to the Texas Gulf Coast at a rate of 200,000 B/D. 

However, still more pipelines are required to significantly eradicate the Permian bottleneck issue. The good news is that in the coming 18 months, three key pipeline networks are likely to be operational and are reportedly to have the combined capacity to carry more than 2 million B/D to the Gulf Coast area from Permian. Reportedly, other fresh networks of pipelines, with transportation capacity of 1 million B/D, will start service. The dates are yet to be announced, according to S&P Global Market Intelligence.  

Pipeline Players in the Limelight

It seems that prospects are bright for midstream energy players, as they are investing in new pipelines to cash in on the bottleneck problem. We are highlighting four such stocks of which one carries a Zacks Rank #2 (Buy), and the other three carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Phillips 66 Partners LP PSXP — headquartered in Houston, TX — is a master limited partnership (MLP) involved in operating and developing midstream energy infrastructure. Among the midstream projects on which the partnership has been working, the Gray Oak pipeline is a notable one.

The giant pipeline, in which Phillips 66 Partners will have a 42.3% interest, is likely to connect Gulf Coast market to the producers of oil in Permian. The market expects the pipeline, with transportation capacity of 900,000 B/D of oil, to considerably ease the bottleneck problem. The partnership expects Gray Oak to commence operations by the December quarter of 2019.

Phillips 66 Partners, with a Zacks Rank #2, is likely to earn significant fee-based revenues from Gray Oak.

Based in Dallas, TX, Energy Transfer LP ET along with Magellan Midstream Partners, L.P.  MPLX LP and Delek U.S. Holdings, Inc. have been constructing the key Permian Gulf Coast pipeline. The pipeline, spreading across 600 miles and is likely to transport massive crude volumes to the Texas Gulf Coast region from the prolific basin.

Energy Transfer, carrying a Zacks Rank #3, is expected to generate huge fee-based revenues once the giant pipeline starts operating from 2020-mid.

Plains All American Pipeline, based in Houston, TX, has formed a joint venture with ExxonMobil and Lotus Midstream, LLC to construct a pipeline that is likely to carry more than 1 million B/D of oil to the Texas Gulf Coast from Permian.

The pipeline — expected to be operational by first-half 2021 — that will be extended over 650 miles is likely to fetch considerable fee-based revenues for this Zacks #3 Ranked stock.

Based in Houston, TX, Noble Midstream Partners LP NBLX has a 30% stake in the EPIC Crude Oil pipeline. The giant pipeline will have the capacity to transport 900,000 B/D of oil to the Gulf coast from the Delaware Basin. The project is likely to start interim service in third quarter of this year and is likely to prove highly accretive for this Zacks Rank #3 partnership.

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Phillips 66 Partners LP (PSXP) : Free Stock Analysis Report
 
Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
 
Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
Noble Midstream Partners LP (NBLX) : Free Stock Analysis Report
 
Energy Transfer LP (ET) : Free Stock Analysis Report
 
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