As Iran Sanctions Kick in and Russia Pumps More Oil, the Money Is on U.S. Export Markets
As renewed Iran-focused, energy-related sanctions come into place in November, the major question for investors is how the energy sector stands to win. The answer is in the transportation of commodities. Our best bets are on Kirby (KEX) , Enterprise Products (EPD) and Frontline (FRO) .
U.S. Exports, a Transportation Play in a World of Sanctions
This week Swiss-based Trafigura Pte, one of the largest crude oil traders in the world, submitted plans to build the first deep water crude oil export terminal in Corpus Christi, Texas, to allow crude oil super tankers, Very Large Crude Carriers (VLCC), to load crude at the port reducing costs and inefficiencies. VLCCs can transport up to 2 million barrels and existing facilities in the Gulf of Mexico are not able to handle fully-laden VLCCs. This is positive news for the industry as players are positioned to benefit from increased export volumes.
Other publicly-traded midstream companies are also exploring similar options - such as Enterprise Products - said in July that it was designing and preparing applications for an offshore terminal in Texas that could include 80 miles of 42-inch diameter pipeline to an offshore terminal capable of loading and exporting crude oil at a rate of one VLCC per day. EPD has already started loading partially full VLCCs at its Seaway terminal in Texas City, Texas, however, VLCC tankers can only be filled half-way because of the shallow depth of the waterway.
The best pure-play transportation companies to benefit from this industry shift are Kirby and Frontline, among others. KEX is +23% for the year, outperforming major energy benchmarks.
As many Permian-focused companies like Pioneer Natural Resources (PXD) and Noble Energy (NBL) are seeking to slow down production activity as they reach transportation bottlenecks, having the appropriate investment in infrastructure is paramount. We think EPD is best positioned to leverage this infrastructure build-out.
Delek US, a Growing Refiner to Play the U.S. Exports
While the U.S. remains an importer of crude oil from Saudi Arabia, Canada and Mexico, its own produced shale oil is lighter than foreign barrels and is not always the best suited to Gulf Coast refineries that are configured towards processing heavier barrels. This makes it more efficient to send light crude oil overseas while importing heavier oil barrels better suited to its refining system.
U.S. independent refiners also stand to benefit from curbed sanctions as they seek to expand outside their regional markets. Among one of the rising stars is Delek US (DK) , a mid-cap refining and marketing company with strong presence in the southern United States and the Gulf of Mexico.
Iran Sanctions Will Have Some Waivers
U.S. energy sector sanctions being re-imposed on November 4 will ban companies from the U.S. financial system if they continue to do business with Iran. President Trump's recent tweet said that "Anyone doing business with Iran will NOT be doing business with the United States" has sent a strong warning across the markets. However, we anticipate the U.S. to give specific waivers such as the Southern Gas Corridor linking Azerbaijani gas from the Shah Deniz field, operated by BP (BP) , into Europe.
The first wave of sanctions includes:
- The purchase or acquisition of US banknotes by Iran's government
- Iran's trade in gold and other precious metals
- Graphite, aluminum, steel, coal and software used in industrial processes
- Transactions related to the Iranian rial currency
- Activities relating to Iran's issuance of sovereign debt
- Iran's automotive sector
The second phase of sanctions will come into effect on November 5, which will have implications for Iran's energy and shipping sectors, petroleum trading and transactions by foreign financial institutions with the Central Bank of Iran.
Russia's Oil Giant Rosneft Increasing its Production and Dividend Payout
Rosneft PJSC is the big elephant in the crude oil markets as Russia keeps strong ties with Iran. Rosneft has posted record cash flows benefiting from rising crude prices and a weakening ruble. The ciompany increased 2Q18 oil production to 4.6 million barrels a day and it has the capacity to add another 200,000 barrels a day in this quarter.
Rosneft may deliver record results for the full year and average dividend growth of $15 through 2020. In addition, the company started a share-repurchase plan totaling $2 billion through to the end of 2020, and the stock is up 47% year-to-date. Rosneft has an attractive 6.5% dividend yield which is likely to be increased on the back of higher earnings and free cash flow.