Winners and Losers from Growing US Crude Oil Exports
06/26/2014 10:30 am EST
There's a loophole in the 1975 ban on US exports of crude oil and even though it's just a drop in the oil bucket, MoneyShow's Jim Jubak believes the loophole will only get bigger with time.
Think of it as a sign of where the road is headed rather than as the end of the journey itself.
A private letter ruling by the Commerce Department creates a limited loophole in the 1975 ban on US exports of crude oil for Pioneer Natural Resources (PXD) and Enterprise Products Partners. The loophole could allow the two companies to export as much as 200,000 barrels of a product called condensate. That's a drop in the oil bucket. (For comparison, the United States imported 7.3 million barrels a day on average during the week that ended on June 20.)
But the economics of the US energy boom say the loophole will only get bigger with time. And the reaction to today's announcement of the letter provides a good test run on which stocks will gain and which will lose from a bigger loophole or an outright end to the ban.
The ban on crude exports has never extended to exports of refined products. In 2013, US exports of refined petroleum products averaged 3.5 million barrels day.
The loophole in the ban has been made possible by the huge increase in US production of light and ultra light grades of crude coming out of the oil shales of the Bakken, Eagle Ford and other geologies. Light and ultra light crudes make up about 96% of 1.8 million barrels a day increase in US production between 2011 and 2013. According to the Energy Information Administration, light and ultra light grades will account for more than 60% of growth in US crude production through 2015.
There's not a whole lot of difference between the lightest of these grades and a refined oil product and that's where the private letter ruling comes in. The Commerce Department has said that a grade of ultra light crude from the Eagle Ford region, call condensate, can be exported as a refined petroleum product if it is first run through a stabilization or condensate splitter unit that will remove some of the lighter and more volatile hydrocarbons and make the condensate safe for transportation.
It's hard to judge the exact economics of building a condensate splitter versus a full-scale oil refinery since the last US oil refinery was built in 1976, but the cost edge to splitters is of the order of “huge.” A freestanding splitter, that is one not connected to a refinery, would cost about $200 million. Estimates for a new refinery run anywhere from $2.5 to $5 billion.
The cost differential isn't the only think driving demand for condensate splitters, though. The existing US refinery infrastructure is designed to work with the heavy sour crudes that the US has been importing from Venezuela and the Middle East. These refineries simply won't work efficiently or at all with ultra light crudes.
Which is why about condensate splitters with 400 million daily barrels of capacity are scheduled for completion by 2016.
This might give you some guidelines for thinking about what stocks went up and down today in the energy sector.
By and large the shares of US refiners went down since any increases in exports is likely to cut the price advantage they now enjoy on the US crude versus global benchmark crudes. For example, US West Texas Intermediate sold for $106.50 a barrel on June 25 while global benchmark North Sea Brent crude went for $114.5 a barrel. If you can buy your crude more cheaply and sell your refined products at global market prices, you should be able to score higher margins. Shares of HollyFrontier (HFC) were down 6.7% on June 25. Refiner Marathon Petroleum (MPC) was off 6.34% and Valero Energy (VLO) was lower by 8.29%.
On the other hand, oil producers with big exposure to the ultra light and light crudes from US oil shares went up. Pioneer Natural Resources, one of the recipients of today's private ruling, moved up 5.15%. Marathon Oil (MRO) was ahead 1.74% and Anadarko Petroleum (APC) rose 2.03%. ConocoPhillips (COP) climbed 0.97% and Continental Resources (CLR) gained 3.05%.
One sector that didn't draw a lot of market interest on the ruling, but that is intriguing to me, is the midstream infrastructure master limited partnerships that seem building condensate splitters as just an extension of their existing pipeline business. Kinder Morgan Energy Partners (KMP), for example, has been building splitters for producers such as BP (BP) near export facilities the MLP already has in place along the Texas coast. (Kinder Morgan Energy Partners is a member of my Dividend Income Portfolio.)
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.