The biggest story of last month was the news that the U.S. Department of Commerce had allowed two companies, Pioneer Natural Resources (NYSE:PXD) and Enterprise Products Partners (NYSE:EPD), to export condensate, a hydrocarbon that can be turned into fuels.
It would be fair to say that after the news was released, investors panicked. Refiners such as HollyFrontier (NYSE:HFC), Valero Energy (NYSE:VLO), and Western Refining (NYSE:WNR) took dives, with stock prices falling as much as 10% in one session. The declines extended over several days.
Plenty to worry about
To put it simply, investors are worried that if the U.S. is allowed to export oil, the price of WTI will converge with the international Brent benchmark. In effect, this will mean that refiners will have to pay more for the crude they buy. Higher prices for crude equals lower profits for refiners.
There are further worries that the latest ruling could be a precursor to further rulings, breaking down the 40-year-old rule against the export of domestic crude from the US.
Still, the Commerce Department said in a recent statement that there has been "no change in policy on crude oil exports." This means that as of yet, it does not look as if the ban on exports will be fully lifted.
Based on the facilities that are in place and under construction to convert oil into export condensate, The Brookings Institution estimates that as much as 700,000 barrels of ultralight oil per day could be flowing out of the U.S. by next year. Eventually, this could increase to as much as three million barrels per day, around 37% of total U.S. production.
Of course, the question on investors' minds is how this will affect their own investments. Well, for Pioneer and Enterprise, it's simple.
Pioneer is now able to export its oil to international markets at much higher prices. The company has constructed a gathering unit in the Eagle Ford shale region that gathers production from wells within the region. The unit then stabilizes the liquids, removing the lightest compounds and making them primed for export.
Estimates vary, but Pioneer could process and export 100,000 to 200,000 barrels of oil per day using this method. In the grand scheme of things, this is not a huge amount; it's around only 2.5% of daily U.S. production.
Enterprises' benefits are less obvious. However, the company has the infrastructure in place to undertake stabilization and exporting. In this case, the license to export could be more of a golden ticket, allowing the company to hike its prices for an extra service.
Are the refiners likely to be affected?
Investors who hold a position in refiners are likely sweating at the losses suffered last week, but it's not time to jump ship just yet.
With exports of light oil condensate expected to be constrained for the next few years (or at least the next 12-18 months), analysts feel that there are very few reasons to turn your back on refiners.
Wall Street has also commented that there is a certain element of media hype around the export scenario. Analysts have stated that stabilized condensate is more akin to a refined product than an "unrefined oil," as it has been characterized by media reports.
What's more, Valero is already a major exported of refined product and HollyFrontier uses a wide advantage crude slate to achieve the best margins, which I've covered the benefits of here.
Valero's spokesman reiterated the fact that the U.S. is still importing a significant amount of crude to meet energy demands. Until production at least covers consumption, allowing exports would be costly for the domestic economy.
This is by no means a comprehensive analysis of the developments currently taking place within the U.S. oil industry, but it does raise some interesting points. For example, it would appear that many investors have panicked by jumping out of the refining sector during the past few weeks.
It is likely that the effects of this ruling will take some time to work through the industry, and the U.S. is still far from lifting the blanket ban on oil exports. It's unlikely that the ruling will have any immediate effect on refiners, and profits should continue to flow.