The surge in U.S. oil production in 2010 has left a glut of oil trapped within the United States. To be sure, the U.S. is by far the largest consumer of oil in the world, so it’s not like all that extra oil sloshing around can’t find a home. But, due to a mismatch between the light, sweet crude coming out of places like the Bakken and the Eagle Ford, and the preponderance of refineries on the Gulf Coast equipped to handle heavier, sourer types of oil, there are local surpluses in supply. As a result, prices are somewhat depressed – for the last few years there has been a large spread between the Brent and WTI benchmarks, at times as wide as $10 per barrel. This has drillers looking overseas for markets.
Yet, U.S. law largely prohibits oil exports. Producers have already had a warm-up debate over energy exports – the glut of shale gas has drillers pushing lawmakers and regulators to approve export terminals for LNG, and the Obama administration has obliged, albeit at a slower pace than the industry wants. Last year, the murmurings of a similar debate – this time over oil – began to emerge. That debate kicked into high gear after the annexation of Crimea by Russia. Producers had shifted back and forth between a litany of arguments to support exports – that LNG and oil exports will grow the economy, create jobs, provide geopolitical benefits, lead to energy independence – which at times fell flat. But, with the Ukraine crisis, the prospect of undercutting Russia’s political machinations finally began to resonate on Capitol Hill. At the same time, Senator Mary Landrieu (D-LA), a huge backer of exports, took the gavel on the Senate Energy and Natural Resources Committee. Working alongside her Republican counterpart Lisa Murkowski (AK), they are aggressively pushing a natural gas and crude oil export liberalization agenda. As far as LNG exports go, they seem to have won. Crude oil is next, and the recent geopolitical events make it relatively likely that the crude export ban will be lifted in the near to mid-term.
Who would win and who would lose should such a scenario play out? The divide within the industry points the way – drillers would win big time, and refiners would lose out. That much is known. But let’s take a closer look.
Losers – Refiners
The U.S. has the ability to refine 17.3 million barrels of oil per day, and 44% (7.7 million bpd) of that refining capacity is located on the Gulf Coast. These refiners stand to lose quite a bit if the U.S. opens up to exports.
Alon USA Energy Inc. (NYSE: ALJ) joined together with a few other refiners to form the Consumers and Refiners United for Domestic Energy Coalition (CRUDE) in order to campaign against lifting the oil export ban. Alon owns the Big Spring refinery in Big Spring, Texas, with a daily capacity of 70,000 barrels. It produces ultra-low sulfur gasoline, diesel, jet fuel, petrochemicals, asphalt and other refined products. The Big Spring refinery uses the light sweet oil from the nearby Permian Basin in Texas. Alon also operates a 74,000 barrel-per-day refinery in Krotz Springs, Louisiana, a little over 100 miles west of New Orleans. Alon’s refineries benefit from relatively cheap U.S. oil, and Alon’s stockprice has risen substantially since mid-2010 alongside the shale oil boom.
A much larger company, Valero Energy (NYSE: VLO), stands to lose if the export ban is scrapped. The largest independent refiner in the United States, Valero has a truly massive Gulf Coast footprint, taking advantage of ample supplies of crude oil coming out of the prolific Eagle Ford, which is now pumping over 1 million barrels per day. In the past Valero made large investments in processing facilities to handle heavy sour crude, which it expected to come in ever larger amounts from places like Canada and Venezuela. For example, Valero’s Bill Greehey refinery complex in Corpus Christi has a capacity of 325,000 bpd, most of it for heavy crude. The tight oil boom in the U.S. changed that, and now Valero is investing $400 million this year to expand light sweet refining capacity, and an additional $865 million on rail and logistics to access the booming oil fields in Texas. The discounted WTI oil in the U.S. is allowing Valero to make hand over fist, and its stockprice has increased by over 200% in the past five years. If the U.S. decided to allow oil to be exported, Valero would lose out big time.
It’s not just Gulf Coast refiners that are worried. PBF Energy (NYSE: PBF) is another refiner that is actively opposing oil export liberalization. A fellow member of the anti-export CRUDE lobby group, PBF has refining positions that benefit from regional supply gluts. PBF operates a massive 170,000 barrel-per-day refinery in Toledo, Ohio. It produces ultra-low sulfur diesel, gasoline, and high-value petrochemicals. The Toledo refinery uses light sweet oil from the Bakken, Mid-Continent, Canada, and the Gulf Coast. Therefore, the current regime governing oil exports is highly advantageous to PBF’s Toledo facility. On the other hand, PBF is a bit more diversified than some Gulf Coast refiners, as it also has two large refineries on the East Coast, one in Delaware and one in New Jersey. With a combined refining capacity of 370,000 bpd, these refineries don’t actually benefit all that much from an export ban, as they import a lot of oil from overseas, which sells at the higher Brent price.
Winners – Drillers
Oil producers would obviously be the big winner of oil trade liberalization. The big boys – the ExxonMobil’s and Chevron’s of the world – would be enormous beneficiaries if the export ban was lifted, but they are so big and diversified that it may only be a blip on their stock prices. The smaller companies that are more pure plays on upstream production would be something to watch.
EOG Resources (NYSE: EOG) is a good choice. It is fresh off an impressive 2013 in which it increased production by an astounding 40%. EOG produced 235,000 bpd last year, with a big bet on the Eagle Ford. Not only that, but EOG recently submitted data to Texas regulators showing promising results from five newly drilled wells, which are already producing 13,000 bpd right off the bat. As they scale up, EOG thinks they will go a long way to helping the company reach their goal of increasing production by another 27% this year. And the Eagle Ford has demonstrated itself to be arguably the best place to be for oil in the United States. If the export ban were to go, EOG would stand to make a pretty penny.
Another company that would benefit from oil exports would be Kodiak Oil & Gas (NYSE: KOG), a pure play bet on the Bakken. It is one of the fastest growing companies in the fast growing oil patch in North Dakota. Kodiak’s oil production jumped by 100% last year, reaching nearly 30,000 bpd. Its reserve profile is tilted heavily towards oil – nearly 83% of its proved reserves are in the form of oil, while only 17% is natural gas. Kodiak projects that it could continue to drill for another 12 years based on its current booked reserves, and that is before considering the fact that they will likely find more. That means the company has enormous growth potential. If and when the ban on exports is lifted, Kodiak will see its value jump. The one downside is the infrastructure constraints that the whole basin is dealing with. Lack of pipeline capacity is forcing the company to move most of its oil around on trains, adding a bit to cost. But, that should sort itself out over the next few years.
Lastly, the Permian Basin is another region that would profit greatly from oil exports. Pioneer Natural Resources Co. (NYSE: PXD) is a major operator in this region, and last year the company produced 161,000 barrels of oil equivalent per day. It holds around 640,000 net acres in the Sprayberry field, and projects that it controls acreage holding more than 8 billion barrels of oil equivalent in this area alone. Pioneer increased production by 12% in 2013, and hopes to boost production by a further 14%-19% this year. Even more exciting, the company expects 2013 levels of production to double by 2018. It also has ambitious plans for the Eagle Ford, from which it produced 38,000 boe per day. Based on these facts alone, Pioneer would be a good investment. But if the U.S. allows oil exports, Pioneer would look even better. The only downside is that Pioneer may already be expensive – its stock has more than tripled since 2011. But, it is still one to watch.
The U.S. has long supported a general policy of free trade. Sometimes it hasn’t practiced what it preached, but there is good reason to believe that proponents of allowing oil to flow out from U.S. ports will win over a skeptical Congress. That campaign has picked up steam in 2014, and it seems just a matter of time before the forty year ban on oil exports gets scrapped. The oil and gas industry usually speaks with a unified voice on policy matters, but the oil export issue has divided them. It is clear to see why that is the case – there are clear winners and losers.