Oil companies in the Permian Basin have been drilling their hearts out over the past few years. Thanks to oil-rich rocks and abundant infrastructure, producers had been able to earn lucrative returns even at lower oil prices. However, drillers have unleashed such a gusher of new oil production that they're on track to completely exhaust the region's pipeline takeaway capacity later this year. That looming issue is forcing several oil companies to slow their pace in the Permian until new pipelines enter service toward the end of next year.
One company, though, is working overtime to solve the industry's current pipeline woes: Plains All American Pipeline (PAA -0.76%). Not only is it doing everything in its power to get its expansion projects built as quickly as possible, but it's developing a range of other solutions to help address the region's infrastructure constraints in both the near and long term.
Drilling down into the problem
Oil production in the Permian is growing at an 800,000 barrel per day (BPD) annual clip. With production recently averaging 3.3 million BPD, the industry is on pace to outstrip its 3.6 million BPD of pipeline capacity in a matter of months, according to an estimate by leading regional driller Pioneer Natural Resources (PXD 1.11%). Because of that, Pioneer Chairman Scott Sheffield told Bloomberg that, "some companies will have to shut in production, some companies will move rigs away, and some companies will be able to continue growing because they have firm transportation" on existing pipelines. Since Pioneer thought ahead and locked up pipeline space for more than 90% of its Permian oil, it won't need to slow down. Instead, it's adding rigs to its fleet to set it up for continued growth in 2019.
Several peers, on the other hand, recently announced activity reductions due to the pipeline constraints. Halcon Resources (HK) was one of the first, announcing in mid-June that it was idling one drilling rig, which reduced its fleet by 25%. As a result of slowing its drilling pace, Halcon Resources expects its production to come in well below its initial forecast. Meanwhile, Noble Energy (NBL) said it would shift some of its drilling activities to other regions while cutting back on the number of wells it expects to complete in the Permian due to the pipeline bottlenecks. As for when Noble Energy might reallocate some resources back to the Permian, "it's going to be tied to export capacity coming on," according to comments by CEO David Stover on the second-quarter call.
Accelerating the solutions
Most who follow the industry don't expect the region's transportation problems to go away until the second half of next year at the earliest given the current time frame of new pipelines. However, Plains All American Pipelines is working hard to shift that timetable up as much as it can. The company has two major pipelines expansions under way: Sunrise and Cactus II. The scheduled in-service dates for these projects are "no later than January 2019 for Sunrise and partial service early Q4-2019 for Cactus II," according to comments by COO Willie Chiang on the company's second-quarter call.
However, Chiang noted that given the high shipper demand, "we are trying to accelerate both of these projects as much as reasonably practical." He noted that this included "incurring additional costs to expedite material deliveries and vendor services and even installing temporary generators for our pumps until permanent utility power is available." These efforts lead Plains to believe that it can place the Sunrise expansion into partial service by the fourth quarter of this year. Meanwhile, the company received one of the permits for Cactus II sooner than it anticipated, which is why it now thinks the line can begin partial service toward the end of the third quarter of 2019, with full service targeted for April of 2020.
In addition to these projects already under construction, the company is working with ExxonMobil (XOM 1.12%) on a large-scale oil pipeline project that will ship more than 1 million BPD out of the region. Plains and Exxon are quickly laying the foundations for this project in hopes of breaking ground soon, with the aim of having it in service by 2021.
Meanwhile, Plains is also working on several smaller de-bottlenecking projects in the region. The company recently announced that it plans to spend an additional $650 million over the next year and a half on several dozen small to medium Permian-related projects such as expanding its pumping capacity to move more oil through its pipelines. In addition to that, it's working on developing other solutions to optimize existing capacity such as expanding current pipelines. These investments will not only generate strong returns for Plains, but enable its customers to ramp up their drilling activities in this lucrative region.
Cashing in on the opportunity
Plains All American Pipelines has been taking advantage of the Permian's need for infrastructure by investing to expand its footprint in the area. Those projects have the company on pace to grow earnings at a mid-teens rate in both 2018 and 2019. Meanwhile, with new projects like the pipeline with Exxon in development, the company has the potential to continue growing at a fast pace for the next several years. Add that upside to its generous income stream, and Plains All American Pipelines has the makings of a strong long-term investment.