Shifting market dynamics like shortages and gluts create opportunities for midstream energy companies, which solve such problems with new infrastructure. The crude oil glut in the Permian Basin is a good example.
On July 21, Bloomberg reported that prices for West Texas Intermediate (WTI) crude have been averaging $7.15 per barrel less than prices at the Cushing, Oklahoma hub. That's because production in the Permian Basin is increasing, and there isn't enough pipeline capacity to move it out of the Midland, Texas area. So traders are turning to more expensive trucks and trains, and driving down crude prices in the area to compensate. The Midland glut is part of a larger trend of oversupply in the Gulf Coast region.
Racing to relieve the pressure
Depressed oil prices hurt exploration and production companies, providing an incentive to work with pipeline companies to get the oil moving. An example of such a joint project is BridgeTex, a 300,000 barrel per day pipeline from Colorado City, Texas to the Houston Gulf Coast area. The 400-mile line, a joint venture of Magellan Midstream Partners and Occidental Petroleum, should be complete this year.
Magellan is a master limited partnership (MLP) that owns the longest refined products pipeline system in the U.S., with a storage capacity of 80 million barrels of gasoline, diesel fuel, and crude oil. Its system has access to more than 40% of the nation's refining capacity. Magellan will operate the completed line.
Occidental is an oil and gas exploration and production company with operations in the U.S., Middle East, North Africa, and Latin America. As an oil producer, Occidental stands to benefit from a reduction in the West Texas oil glut, so its interest in the project goes far beyond any immediate gain from the BridgeTex pipeline itself.
A key connection
The BridgeTex pipeline starts in Colorado City, which is 80 miles northeast of Midland, so what's missing is more pipeline capacity in the corridor from Midland to Colorado City. In May, Plains GP Holdings and its MLP, Plains All American Pipeline, began construction on a new pipeline that will provide such capacity. Plains All American's 250,000 barrel per day Sunrise line will transport crude along the 80-mile corridor from Midland to Colorado City, completing the crucial link by 2015.
The above slide shows the Sunrise line under construction from Midland to Colorado City, in addition to several other projects in the Permian Basin. Plains All American expects to invest $800 million in the Permian during 2014, increasing its system in the area to a total of 1,000 miles of pipeline.
Plains handles an average of over 3.5 million barrels per day of crude oil, refined products, and natural gas liquids throughout North America. Its assets include 16,900 miles of pipeline, 24 million barrels of crude storage capacity, 97 billion cubic feet of gas storage, and 11 gas processing plants. Operating through three business segments, it owns or leases thousands of trailers, barges, and railcars.
Should Fools rush in?
Due to the crude oil glut, there's no shortage of capital investment opportunities in the Permian Basin right now for companies like Plains All American and Magellan.
Magellan is stronger all around, with much higher revenue, margins, and net income growth. However, since Magellan owns its own general partner, it's only appropriate for MLP investors looking for tax-advantaged current income. Distributions have risen since last year, but the company has an unusually large value of 1.90 for its coverage ratio. That might be why its yield of 3% is nothing to write home about.
Plains All American Pipeline Partners is also an MLP, but investors who don't want to deal with complex tax issues can turn to Plains GP Holdings instead. Margins are thin at Plains, and net income growth has suffered. The MLP's distribution coverage ratio is a solid 1.19, so there's no cash flow problem in sight.
Scott Percival has no position in any stocks mentioned. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.