U.S. crude oil prices continue to break the $70 ceiling barrier on the back of increased geopolitical risk, trade war talks and Middle East standoffs, thus providing support for long-term investments in energy infrastructure as domestic crude oil and natural gas production continues to flow the markets.
The largest boom in the U.S. oil sector will continue to be the growing export market for crude oil, refined products and liquified natural gas (LNG). Last week, the leaders of Portugal, France and Spain met in Lisbon during the Energy Interconnections Summit and agreed to move ahead to diversify their energy resources and develop a regional interconnection system to strengthen cooperation among the three countries which could mean potentially more LNG imports from the U.S.
Iran will continue to be in the geopolitical agenda at least until the end of the year, as U.S. trade partners asses their choice for Iran's crude supplies. The choice for trade partners is: 1) challenge the U.S. on the Iran embargo and keep buying Iranian crude or 2) Tag along with the U.S. and source their crude from elsewhere. Ironically, even countries like war-torn Iraq, have found ways to circumvent Iran's commodity supplies, as the country is currently in negotiations with Saudi Arabia on building a 3,000-megawatt power plant to supply Iraq with electricity at a fraction of what it pays Iran.
There is growing concern among institutional investors about President Trump's knee-jerk reactions triggering further geopolitical pressure. The worries include waking up to oil price volatility triggered by a midnight tweet, the specter of a potential release from the U.S. Strategic Petroleum Reserves (SPR), or headlines of further escalation of a trade war with allies.
ExxonMobil Will Continue to Pursue Oil Developments, a Strong Market Signal
In its recent earnings call, ExxonMobil (XOM) emphasized that U.S. natural gas as economics do not stack up versus liquids in their portfolio, and when the industry heavyweight speaks up, investors listen. XOM noted that given the energy business is a depletion business, and each day they need to go to work with a choice of what to drill (as yesterday's wells decline) and are increasingly pursuing liquids wells over gas wells.
Increasing Private Equity Transactions in U.S. Midstream Sector
As crude oil and gas production grow across the various U.S. basins, fueled by rising commodity prices, the major investment theme is how to get the commodity out of the producing basin into the local consuming or export markets. We think that midstream companies like Williams (WMB) are well positioned to leverage this trend shown by their recent acquisition of Discovery DJ Services from private equity giant TPG Growth, in partnership with KKR & Co (KKR) . Discovery provides midstream services to oil & gas producers drilling the prolific Niobrara and Codell formations in the DJ Basin in Colorado, which are rich, stacked-pay zones. Companies like Discovery are valuable because they include both natural gas and crude oil gathering pipelines, cryogenic gas processing, liquids handling and crude oil storage.
Crude Export Terminals, Key for Profitability
Our favorite midstream play is Delek US (DK) a mid-cap refining and marketing company with core exposure to the southern states and the Gulf of Mexico. DK is one of the independent refiners which hasn't entered the Mexico market yet, providing a growth opportunity. Companies like Valero Energy (VLO) , and Andeavor Energy (ANDV) have inked deals already with Mexico's National Oil Company, Pemex, to provide terminal and storage services for refined products.