Pioneer Natural Resources (PXD -2.83%) is forecasting that the Permian Basin will produce 3.2 million barrels per day of crude oil by 2025, up from 1.2 million bpd in 2012. That's a lot of oil. There are plenty of variables to watch out for, but one thing is for certain: Growth is under way.
Growth
Pioneer Natural Resources sees 50 billion barrels of oil equivalent in the Spraberry/Wolfcamp part of the Permian Basin alone, with production hitting roughly 2 million gross barrels of oil equivalent a day by 2025, and rising to roughly 2.5 million gross barrels of oil equivalent a day by 2033.
This is in part due to Pioneer Natural Resources' ramp up in the area, with its rig count rising from 12 to 50 by 2018. In the short term, Pioneer Natural Resources plans on increasing the number of horizontal rigs in the play from five to 10 or more by 2014.
Pioneer Natural Resources has its growth plans, but it is just one piece of the puzzle.
Expansion
Magellan Midstream Partners (MMP) is offering Permian Basin exploration and production players an additional 575,00 bpd of crude transportation capacity over the next year. The Longhorn Pipeline was just completed, bringing online 225,000 bpd of capacity. Some 50,000 bpd of additional capacity is expected to be completed by mid-2014.
Magellan Midstream Partners also has a joint venture with Occidental Petroleum to build the BridgeTex Pipeline, which will carry 300,000 bpd of crude from the Permian Basin to refineries starting somewhere in 2014.
17% of its total operating margin (year-to-date) was attributed to crude oil in the third quarter of 2013, with the rest coming from refined products. Going forward, Magellan Midstream expects to spend 75% of its expansion capital expenditures on crude oil projects. This way Magellan Midstream can be instrumental in the Permian Basin growth story.
Pioneer Natural Resources needs midstream companies like Magellan Midstream to direct capex toward crude oil pipelines. Magellan's BridgeTex JV pipeline could have its capacity increased, just as the Longhorn Pipeline's capacity is being increased.
Magellan Midstream is adding 350,000 bpd of crude oil transportation capacity on top of the 225,000 bpd of capacity it already has in place. In total, that is 575,000 bpd of crude oil transportation capacity, which goes nicely with the 200,000 bpd coming online from Plains All American's Cactus pipeline and 260,000 bpd from Sunoco's two pipelines.
Magellan is going to be responsible for half of the new pipeline capacity coming online soon that will transport crude out of the Permian Basin. While more pipelines must be built, Magellan Midstream is seeking to make itself a major player in crude transportation after long neglecting the sector in favor of refined petroleum products.
A neighboring play
Magellan Midstream is also part of a joint venture with Kinder Morgan to carry condensates from the Eagle Ford to Magellan's Corpus Christi terminal, which has 500,000 barrels of storage capacity.
The Double Eagle pipeline has a capacity of 100,000 bpd, and is an example of how Magellan is linking one profit machine to another.
Final thoughts
Now that Magellan is focusing on crude, it can truly play America's oil boom. E&P players are the main beneficiary of the oil boom, but they are subject to fluctuating oil prices.
Magellan isn't affected by individual E&P companies' results, but rather it is a beneficiary of the entire play and a way to safely play the rise of the Permian Basin's output. Pioneer Natural Resources is a great way to invest in the Permian Basin directly if you are willing to take on a bit of risk.
