Oil producers in the Permian Basin are expanding their output so fast that they're about to overwhelm the region's pipeline capacity. According to one estimate, pipelines could reach their limit in just a few months. This infrastructure bottleneck has become a problem for producers without firm capacity commitments on pipelines to get their crude out of the region.
However, an issue for some is an opportunity for others. One company profiting from the Permian's pipeline capacity constraints is Occidental Petroleum (NYSE:OXY). The largest oil and natural gas producer in the region, it owns its own pipelines, and has already hauled in hundreds of millions of dollars in added revenue by taking advantage of their spare capacity. Now, according to a report by Reuters, it is looking to further cash in on the rising value of its oil infrastructure in the region by putting it up for sale. Given its market access and the current supply/demand imbalance, Occidental's midstream system could fetch a significant premium.
Testing the waters
According to Reuters, Occidental Petroleum is exploring an auction of its midstream assets that could include its Centurion Pipeline system in the Permian, its stake in the Dolphin natural gas pipeline in the Middle East, and its interest in the Oxy Ingleside Energy Center, which is a crude oil storage and export terminal along the Gulf Coast. In addition to those midstream assets reportedly going up on the block, the company also owns an interest in Plains GP Holdings (NYSE: PAGP), which is the general partner of oil pipeline MLP Plains All American Pipeline (NYSE: PAA), as well as some gas processing plants and infrastructure relating to its enhanced oil recovery business in the Permian.
Among the assets it's looking to sell, the Centurion Pipeline and Oxy Ingleside stand out. Centurion is a 2,900-mile-long system that gathers and stores oil produced in the West Texas and New Mexico region, and ships it to the country's biggest crude storage hub in Cushing, Oklahoma. Overall, the system has the capacity to transport 720,000 barrels per day (BPD) and can store 7.1 million barrels. That makes it a major system in the context of the Permian, which currently has only 3.6 million BPD of total pipeline capacity and is producing 3.3 million BPD, which is up a jaw-dropping 37.6% over the past year. Meanwhile, Oxy Ingleside is the largest export hub for Permian crude, and is undergoing an expansion to increase its export capacity to 750,000 BPD. That project should be complete by the second half of 2019.
Lots of appeal
Occidental Petroleum reportedly tried to find a buyer for its stake in the Ingleside terminal last year, but didn't complete a deal. However, it could be successful this time around thanks to the heightened awareness of the importance of market access for Permian crude. Due to the upcoming pipeline constraints, oil in the region has traded well below both the domestic (WTI) and global (Brent) oil benchmark prices. That's why oil producers have been working to lock up access on pipelines to ship their crude to higher priced markets such as Cushing or the Gulf Coast, where they can also gain access to export markets.
In addition to holding appeal for producers, the system would be a desirable purchase for midstream companies. For example, Plains All American Pipeline would be a logical buyer since it's building a new 585,000 BPD oil pipeline to Corpus Christi, Texas, which is close to Ingleside. On top of that, Plains owns a large oil-gathering system in the Permian, and operates pipelines heading to Cushing. Thus, Occidental's assets would be an excellent strategic fit in its portfolio. However, Plains is just one of many midstream companies that could benefit from picking up Occidental's Permian oil pipelines and export terminal -- the company should have no shortage of suitors.
An interesting sale to watch
Due to the current infrastructure crunch, Occidental Petroleum believes that it can get more than $5 billion for its midstream assets. That would provide the company with a significant amount of capital, some of which it could use for a needle-moving stock buyback. Given what share repurchase programs have done for its rivals, this sale could be quite the catalyst for Occidental's stock, making it something investors should watch closely.