The Winners of Free Oil Exports

 | Jul 02, 2014 | 11:00 AM EDT
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Exciting news for those investing in shale oil names: last week, the U.S. granted approval to two companies to export limited quantities of condensates, which are a fuel source now produced in abundance in the U.S. thanks to the shale revolution.

While Charles Ebinger, a director at the Brookings Institution, thinks that move was just a symbolic gesture, he still believes that we may see the crude oil export ban totally lifted before the close of 2014. For those of us who are long shale oil names, this would represent a huge gust of wind into the sails. A lift on the export ban would allow domestic oil to enter global, Brent-priced markets. A narrowing of the spread between WTI and Brent would, in turn, most likely mean the WTI going significantly higher to meet Brent. With the way things are now, I would expect a $4-$5 upward move in realized oil prices.

But the significance of lifting the ban goes far beyond a bump in realized prices. Lifting the export ban will probably alleviate a future glut of domestic light, sweet crude, a glut which looms on the horizon. For example, management at midstream pipeline giant Plains All American (PAA) believes that, by 2018, the US will produce a million barrels per day more than it consumes of condensate and light, sweet crude. Alleviating that glut through exports will mean not only higher realized prices but also a reduction in the price volatility that would come with such a glut.

Although there is certainly no guarantee that the crude export ban will be lifted, the biggest winners in such a scenario will be the producers able to grow production the fastest. Over the next few years, I believe that the fastest-growing producers will be not in the Bakken or Eagle Ford but in the Permian and the Tuscaloosa Marine Shale. Of the new shale plays being explored, the Tuscaloosa and the Permian are so far the most economically viable.

The Permian offers a myriad of choices, first of which should be the $32 billion Pioneer Natural Resources (PXD). Pioneer is the most established player among horizontal Permian drillers. Despite the company's size, Pioneer expects to grow production by between 16% and 21% until 2016 at least, and I believe that number could be bumped up if the export ban is lifted. For a smaller name in the Permian, consider Parsley Energy (PE), a newly-public company with a much smaller market cap of just $3.5 billion. Parsley was founded by Bryan Sheffield, the son of the founder of Pioneer Natural Resources. For such a small company, Parsley's massive nine-rig drilling program is quite eye-opening. I would not be surprised to see triple-digit production growth out of this name if the export ban gets lifted.

In the Tuscaloosa, the dominant player continues to be Goodrich Petroleum (GDP), which has a gigantic 400,000-plus acre position in the core part of the Tuscaloosa. So far, Goodrich's test wells have been comparably prolific to core Bakken and core Eagle Ford acreage.

If the crude export ban is indeed lifted, like the Brookings Institution seems to believe could happen this year, then the shale oil production renaissance will likely continue on to the Tuscaloosa Marine shale and the Permian Basin. Pioneer, Goodrich and Parsley are by no means the only good choices; but they are three good places to start looking. 

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