Lack of takeaway capacity (via pipeline) could be a significant issue for the Permian Basin upstream companies, especially those way out in the Delaware Basin. It is also quite bullish for several of the midstream companies in our High Yield Income Portfolio.
A US shale bottleneck is threatening oil prices. Business Insider.
The Permian basin is driving U.S. shale growth, with expectations that the basin will add enormous volumes this year, keeping the oil market well-supplied. But the Permian's pipeline network is already filling up, forcing steep discounts for oil, and threatening to derail the aggressive growth projections for the region. The EIA predicts the Permian will hit 3.156 million barrels per day (mb/d) of output in April, an increase of 80,000 bpd from March, and up a shocking 850,000 bpd from a year ago. Shale E&Ps and the oil majors are pouring in billions of dollars into the region, and two out of every three rigs the industry is adding is going into the Permian. But the shale basin is getting crowded, which not only means skyrocketing prices for land and a search for opportunities along the periphery, but also rapidly shrinking availability on the Permian's pipeline network. "As these fringe areas begin to get exploited, we are seeing more and more crude that needs to find a pipeline to Cushing or the Gulf Coast," John Zanner, energy analyst for RBN Energy, told Reuters.
Read full article here: http://www.businessinsider.com/us-shale ... ?r=UK&IR=T
Bottlenecks may be a Big Problem
Bottlenecks may be a Big Problem
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Bottlenecks may be a Big Problem
From the April STEO: "Crude oil price spreads: Crude oil production in the Permian region of Texas and New Mexico
could be facing pipeline constraints, which is reflected in a widening discount of WTI Midland
crude oil prices to Magellan East Houston crude oil prices. The WTI Midland price discount
settled at -$8.70/b on April 5, the largest discount since price postings for Magellan East
Houston began in 2016 (Figure 2).
According to EIA’s March Drilling Productivity Report (DPR), crude oil production growth in the
Permian region is forecast to accelerate in March and April, growing month-over-month by 0.07
million b/d and 0.08 million b/d, respectively. The latest pipeline out of the region to begin
service is the 0.4 million b/d Midland-to-Sealy pipeline, which began service in the fourth
quarter of 2017 and is starting full operations this month. However, the widening price spreads
suggest that takeaway constraints could already be affecting oil producers. New pipelines and
pipeline expansions are not expected to be completed until the middle of 2019, which could
lead to further price volatility for Midland crude oil".
We are having a discussion on another forum about this hurting the share price of Permian names as earnings come out and investors realize this issue. What Permian names do you think may be most affected by this? The idea is to maybe be in other names until later. But, a rising tide lifts all boats.
could be facing pipeline constraints, which is reflected in a widening discount of WTI Midland
crude oil prices to Magellan East Houston crude oil prices. The WTI Midland price discount
settled at -$8.70/b on April 5, the largest discount since price postings for Magellan East
Houston began in 2016 (Figure 2).
According to EIA’s March Drilling Productivity Report (DPR), crude oil production growth in the
Permian region is forecast to accelerate in March and April, growing month-over-month by 0.07
million b/d and 0.08 million b/d, respectively. The latest pipeline out of the region to begin
service is the 0.4 million b/d Midland-to-Sealy pipeline, which began service in the fourth
quarter of 2017 and is starting full operations this month. However, the widening price spreads
suggest that takeaway constraints could already be affecting oil producers. New pipelines and
pipeline expansions are not expected to be completed until the middle of 2019, which could
lead to further price volatility for Midland crude oil".
We are having a discussion on another forum about this hurting the share price of Permian names as earnings come out and investors realize this issue. What Permian names do you think may be most affected by this? The idea is to maybe be in other names until later. But, a rising tide lifts all boats.
Re: Bottlenecks may be a Big Problem
It will primarily hurt those that do not have space lined up on pipelines for their production. It will likely be an issue raised on Q1 conference calls.
It is probably a bigger issue in the Delaware Basin.
It is probably a bigger issue in the Delaware Basin.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Bottlenecks may be a Big Problem
"Everyone and his uncle have known for some time that Permian crude production is rising fast and that incremental pipeline takeaway capacity needs to be added soon. What’s thrown folks for a loop, though, is that production in recent months has been increasing even more quickly than expected, putting added pressure on an already tight takeaway situation and causing differential blow-outs a year before any significant pipeline capacity will be added."
"Historically, many smaller E&Ps in the Permian made educated bets on leases in the hope of earning big returns. More specifically, to set themselves up as targets for mergers and buyouts, they would acquire promising acreage — often adjacent to or interspersed with a larger competitor — drill enough wells to hold on to that lease and demonstrate the potential productivity of their acreage, and then flip it to a much bigger player at a large profit (a lucrative proposition for their management teams)"
"The big issue for these smaller players — who would prefer to sell their assets sooner rather than later — is that they may not want to lay out the cash required for the development of a dedicated gathering system (a major capital investment) and/or securing shipping space on a takeaway pipeline (a long-term commitment)"
Excerpts from this excellent article from RBN. https://rbnenergy.com/all-dressed-up-wi ... production
This is making me rethink my holding positions in smaller potential Delaware E&P names at this time.
Dan, do you think this may lead to some downward pressure on small Permian names after 1Q earnings and forecasts come out?
It is a struggle between selling those names now to buy back later in the year at a lower price (which is where the majors will want to pick them up at) or to hold against a backdrop of big draws in storage coming up leading to higher crude prices and a rising tide which lifts all boats.
"Historically, many smaller E&Ps in the Permian made educated bets on leases in the hope of earning big returns. More specifically, to set themselves up as targets for mergers and buyouts, they would acquire promising acreage — often adjacent to or interspersed with a larger competitor — drill enough wells to hold on to that lease and demonstrate the potential productivity of their acreage, and then flip it to a much bigger player at a large profit (a lucrative proposition for their management teams)"
"The big issue for these smaller players — who would prefer to sell their assets sooner rather than later — is that they may not want to lay out the cash required for the development of a dedicated gathering system (a major capital investment) and/or securing shipping space on a takeaway pipeline (a long-term commitment)"
Excerpts from this excellent article from RBN. https://rbnenergy.com/all-dressed-up-wi ... production
This is making me rethink my holding positions in smaller potential Delaware E&P names at this time.
Dan, do you think this may lead to some downward pressure on small Permian names after 1Q earnings and forecasts come out?
It is a struggle between selling those names now to buy back later in the year at a lower price (which is where the majors will want to pick them up at) or to hold against a backdrop of big draws in storage coming up leading to higher crude prices and a rising tide which lifts all boats.
Re: Bottlenecks may be a Big Problem
From the article at the link above: "As we said in Part 1, Permian crude production is growing at a breakneck pace, pipeline takeaway constraints are worsening by the day and, as a result, Permian producers without takeaway capacity locked up have been taking a big hit on crude prices."
The point is that the producers without takeaway capacity lined up have the most exposure to this problem.
Yes, there is higher risk to the small-caps that don't have takeaway capacity lined up. I am sure this question will come up on Q1 conference calls.
I think this is a bigger problem in the Delaware Basin than it is in the Midland Basin. See FANG's Q1 operations update.
The point is that the producers without takeaway capacity lined up have the most exposure to this problem.
Yes, there is higher risk to the small-caps that don't have takeaway capacity lined up. I am sure this question will come up on Q1 conference calls.
I think this is a bigger problem in the Delaware Basin than it is in the Midland Basin. See FANG's Q1 operations update.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group