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Phillips Inks Oil-by-rail Deal

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Downstream energy company, Phillips 66 (PSX) has struck a five-year deal with Global Partners L.P. (GLP) for 50,000 barrels per day (:BPD) or 91 million barrels of North Dakota crude oil that is to be delivered by rail to its Bayway refinery in New Jersey.

Per the contract, Phillips 66 will utilize Global Partners’ rail transloading, logistics and transportation system to carry crude oil from the Bakken region in North Dakota to Phillips 66’s New Jersey refinery. The cost of the transaction, which is expected to close in the first quarter of this year, was not disclosed.

Growing oil production from the Bakken oil field has doubled during the last two years and most of the pipelines transport oil from West Canada and North Dakota to the Gulf Coast. This leaves the East Coast refiners dependent on railcars to ship domestic oil.

In 2012, the company already made expansions to deliver more shale crude to its refineries by truck, rail, barge, ocean-going vessels, and pipelines. Management also asserted that Phillips 66 is the first company to ship shale crude to the East Coast.

The energy market in the East Coast region is considered the biggest in the country. According to the U.S. Energy Information Administration, in October 2012, 4.6 million BPD of gasoline, diesel and other petroleum products were sold.

With the advent of new drilling techniques, oil and gas production has increased to a considerable amount but logistics and construction issues have slowed down new pipeline projects. Hence, the rail companies benefit from their capability to employ their existing means to connect.

In 2012, Phillips 66 purchased 2,000 rail cars to provide domestic crude oil to its refineries. Another refiner Tesoro Corporation (TSO) built a 10,000-car "pipeline on rails" to transport crude oil from the Bakken field to its refinery in Anacortes, Washington.

Phillips 66, an independent publicly traded company, was formed after the spin-off of the refining/sales business of ConocoPhillips (COP) in May 2012. The move has resulted in the creation of the largest refining company in the U.S. and the largest exploration and production player based on oil and gas reserves.

Phillips 66 currently retains a Zacks Rank #2, which translates into a short-term Buy rating.

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