We have analyzed the weekly U.S. crude production figures reported by the Energy Information Administration, which have averaged an all-time record 11 million barrels a day for the past two weeks -- a 16% boom since early January. As a result we are building a bullish view on midstream infrastructure investments.
To date, the U.S. has passed Russia to become the largest crude oil producer in the world, and the future is even brighter for the U.S. oil industry as the shale sector as a whole is on track to achieve positive free cash flow in 2018, according to the International Energy Agency. Investments were up 60% last year and are expected to be up another 20% to 25% in 2018. Thus, crude exports are the new U.S. energy game.
In regards to Exploration & Production stocks, the SPDR S&P Oil & Gas E&P ETF ( XOP) sold off in mid-May as pipeline constraints started to hit the price of Permian crude oil, nevertheless, the index has bounced back since then and is up 16% year-to-date, substantially outperforming the S&P 500 for the same period.
Corpus Christ Terminal, a Place for Growth
Recently, Harvest Pipeline Company and global crude oil trader Vitol, partnered up to build a state-of-the-art crude oil terminal in the Port of Corpus Christi. The port of Corpus Christi recently raised $216 million from the sale of senior lien revenue bonds to help fund its bid to export crude oil via Very Large Crude Carriers (VLCC). While there's no direct publicly traded play to express this growth exposure, we recommend exposure to Frontline Ltd (FRO) , one of the world's largest VLCC operators as proxy, given their global footprint in crude oil transportation. FRO carries an attractive 10.45% dividing yield, among the highest versus energy peers.
For Investors, the Money is on the Midstream
According to the EIA, natural gas output will expand by 23 billion cubic feet (or 32%) through 2025 from last year, increasing the pressure to export the commodity out of the producing regions. According to Tellurian (TELL) , it would take over $170 billion in infrastructure investment over the next seven years to keep up with the shale gas boom as increased production creates opportunities for new infrastructure in all major unconventional plays. Thus, it is clear that the country needs investment in pipelines, compressor stations and export terminals.
Major projects coming online over the next 3 years include:
I. WestTex, Roadrunner East, operated by ONEOK ( OKE) in 2019.
II. Gulf Coast Express, operated by Kinder Morgan ( KMI) and DCP Midstream (DCP) , coming online in 2020.
III. Pecos Trail Pipeline, operated by NAmerico Energy Holdings, slated to be operational in 2019.
IV. Permian Highway Pipeline Project, operated by Kinder Morgan ( KMI) and Apache Corp ( APA) , late 2020.
V. Permian-to-Katy operated by Sempra ( SRE) and Boardwalk.
VI. Permian Global Access operating by Tellurian coming online in 2023.
In addition, bottlenecks in the Permian Basin of Texas and New Mexico at the center of the shale boom are creating opportunity for pipeline builders, who are planning an array of new oil and gas pipelines in Texas, where there is increased demand from customers willing to pledge into long-term contracts. For example, Epic Midstream Holdings, Plains All American Pipeline LP ( PAA) , and Phillips 66 ( PSX) in a partnership with refiner Andeavor ( ANDV) are building new oil pipelines aimed at Corpus Christi that are set to add upward of 1.8 million barrels of combined capacity late next year.
For yield-focused investors, we recommend taking a position in Enterprise Product Partners ( EPD) , one of the U.S. largest pipeline operators, which is best positioned to export of Ethane and LPG. EPD has an attractive 6.12% dividend yield and plenty of growth upside as it carries further expansion plans of their infrastructure. Other large midstream infrastructure play includes Western Gas ( WES) , an affiliate of Anadarko Petroleum ( APC) . WES has a 7.72% dividend yield.
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Oil market dynamics in 2023 are a far cry from what was seen in 2022.
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