• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Be Patient With E&P Companies

Another leg up is on its way.
By DANIEL DICKER Jun 30, 2014 | 11:00 AM EDT
Stocks quotes in this article: PXD, EPD, WNR, HFC, TSO, PSX, VLO, EOG, XEC

The ostensible end of the domestic crude import ban ended last week, as we saw catastrophic stock retreats from all the major dedicated refiners. What we didn't see is an equally enthusiastic price response for the mid-cap exploration-and-production (E&P) companies working in the Eagle Ford and Permian basins. Both of these trends strike me as worth heeding: I would not own any refinery stock right now and I remain cautious on the newly advantaged (E&P) players.

Many analysts are pushing back on my point of view on the new Commerce Department ruling on Condensates, giving "refined product" status and, therefore, export ability to these grades of crude oil -- specifically to Pioneer Natural Resources (PXD) and Enterprise Product Partners (EPD). While they believe that it is a small ruling that will only marginally affect exports, I believe it marks the end of the export ban.

While infrastructure to distill sweet crude barrels into condensate is rare today, this ruling will create a fast-growing cottage industry to install the relatively cheap distillation units all over West Texas and in North Dakota. It is in this processing and transport opportunity that Enterprise was included in the PXD ruling. Every player in the Bakken, EFS and Permian will scream for precisely the same dispensation that Pioneer got, and Commerce will be hard pressed not to give it. In the end, it will not be the barrels that are exported that will matter to these E&P companies anyway ¿ It will be the option that export gives them, which will insure a basis price that is much, much closer to global benchmarks -- in many cases, more than $20 a barrel higher.

The refineries will definitely lose their margin advantage that cheap crude has given them for much of the past four years. The mid-continental refiners with strong access to glutted crude sources such as Western (WNR), Holly Frontier (HFC) and Tesoro (TSO) will feel the margin cut first, while Gulf Coast refiners like Phillips 66 (PSX) and Valero (VLO) won't be long behind. This is a margin collapse that will get worse as the progress of condensate distillation gains steam. I wouldn't own a refinery stock right now at any price.

But why shouldn't the E&Ps have seen a greater rebound last week on this good news for them? The reason is that while refinery stocks are more apt to react to future threats, E&P companies are very much required to "show me the money" today in order to woo new investors. The potential production for Pioneer and EOG Resources (EOG) and Cimarex (XEC) are already well priced into their shares, while this price premium is still months away.

I am virtually alone in believing that the WTI/Brent spread will be permanently smashed by this Commerce Department ruling and margins between Midland WTI (Permian crude), Bakken blends and Louisiana Light Sweet (Gulf Coast refinery benchmarks) are destined to collapse forever. That makes it inevitable that those E&P companies I mentioned will see another significant leg up -- but not until the first quarter of 2015 at the earliest, as the condensate decision is more widely felt.

Bottom line: If you are long E&P companies, be patient. Another leg up is on its way. And, if you're long refiners, get out -- it's going to get worse for them.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Dicker had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Energy

More from Energy

Don't Waste Energy Divining Energy's Future; Ride With LNG Shippers Instead

Jim Collins
Jan 21, 2021 10:30 AM EST

A hot market for liquefied natural gas makes companies that transport the fuel sensible plays at a time when oil is demonized.

Renewable Energy Group Is Set to Drive to New Highs

Bruce Kamich
Jan 21, 2021 10:08 AM EST

REGI is the nation's largest biodiesel maker.

At What Price Is Ballard Power Systems a Buy?

Bruce Kamich
Jan 15, 2021 3:09 PM EST

Let's check out the latest charts of BLDP.

Time to Nail Down Some Profits on Halliburton

Bruce Kamich
Jan 14, 2021 10:47 AM EST

Our latest technical analysis and trading strategy for the oil services stock.

A Rising Tide Is Going to Lift LNG Shippers in a Very Cold Winter

Jim Collins
Jan 14, 2021 10:30 AM EST

Also, my take on Jack Dorsey and Twitter, along with Facebook.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login