Exciting news for oil investors: Late last week the U.S. granted approval to two companies to export limited quantities of condensates. Condensates are a fuel source derived from light, sweet crude oil, which is now produced in abundance here in the US, thanks to the shale revolution.
Really, this is just a symbolic gesture, or a "baby step," in the words of Charles Ebinger, a director at the Brookings Institution. Still, Ebinger believes that we may see the crude oil export ban totally lifted before the close of 2014.
For the shale oil revolution going on here in the U.S., this would represent a huge gust of wind into the sails for a few reasons. Remember, crude oil that gets exported will be realized at Brent crude prices and not the most common domestic price, West Texas Intermediate. As of Friday, the spot price for Brent was more than $113. The spot price for West Texas Intermediate is only $105 and change. That spread has been roughly consistent for the last few years. A $6-$8 jump in realized prices would be great for domestic producers.
Of course, it's a bit more complicated than that. With the addition of some 1 million barrels per day of domestic oil to the global markets, the price of Brent will likely go down a little, and the price of West Texas oil should also go up.
Lifting the export ban will probably alleviate a future glut of domestic light, sweet crude, a glut which looms on the horizon. Management at midstream oil giant Plains All American believes that, by 2018, the U.S. will produce about a million barrels per day more than it consumes of condensate and light, sweet crude. Alleviating that glut through allowing exports also means a reduction in the price volatility that would come with such a glut.
Here is another way to look at the situation: Lifting exports will mean that U.S. oil will no longer be beholden to a domestic market where demand is flat to declining. Instead, U.S. crude can be sold on the global market, where demand is modestly increasing.
The big winners?
Finding the companies that benefit the most in this environment does not need to be a complicated task. If the crude oil ban is going to be lifted, and there's certainly no guarantee of that yet, the biggest winners will be producers in the U.S. that are able to grow production the fastest.
Of the oil shale plays in the U.S. still largely under exploration or appraisal, the two most promising are the Permian and the Tuscaloosa Marine shale.
Of course, there are several choices in either of these plays. The dominant player in the Tuscaloosa is Goodrich Petroleum (NYSE: GDP ) , which has a gigantic 400,000-plus acre position in the core part of the Tuscaloosa. While it's too early to get a long-term production growth estimate from Goodrich, we do know that its wells are comparably prolific to the Bakken and the Eagle Ford plays.
The Permian Basin, in Texas, covers much more territory than does the Tuscaloosa, and there are a myriad of companies engaged in horizontal drilling here. The most prolific is Pioneer Natural Resources (NYSE: PXD ) . Pioneer is an established company with a $32 billion market cap. Even still, on the Permian's back, management expects to grow production by between 16% and 21% until 2016 at least. With the export ban lifted, I believe this growth could continue well past 2016.
For a smaller name, consider Parsley Energy (NYSE: PE ) , a newly public company with a market cap of just $3.5 billion. Parsley Energy was founded by Bryan Sheffield, the son of the founder of Pioneer Natural Resources. For such a small company, Parsley's massive nine-rig drilling program in the Permian is quite eye-opening. Parsley is sure to be a high-growth company, especially if the crude export ban is lifted.
If the crude export ban is lifted, like the Brookings Institute seems to believe could happen this year, then the shale oil production renaissance will likely continue on to the Tuscaloosa Marine shale and the Permian Basin. While Goodrich, Parsley, and Pioneer are certainly not the only choices available, all three are a good place to start looking.
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