Recently there have been two big, interrelated news stories coming out of the U.S. energy sector. The first is that the U.S. crude oil production continues to grow, and the U.S. has become the world’s largest producer of energy liquids. This growth has been led by the Permian Basin play in West Texas.
The parallel story is that the Permian production is growing so fast, there is not enough pipeline capacity to get the crude oil and related energy commodities out of West Texas to refineries and export facilities. These energy transportation needs are permanent and energy infrastructure companies are racing to provide additional capacity.
Along with crude oil, the Permian wells produce natural gas and natural gas liquids (NGLs). In its 2018 Investor Day presentation Plains All American Pipeline LP (PAA) stated that energy liquids production in the Permian has grown from less than two million barrels per day to a forecast average of 4.8 million barrels per day in 2018. Now in mid-2019 crude oil production in the Permian is up one million barrels per day compared to a year ago.
The problem now in the Permian is that all the take away pipelines are full, production continues to grow, and producers are scrambling to get their crude oil, NGLs, and natural gas out of the Basin. The ready solution is to truck the oil, which costs $10 to $20 per barrel, which is much higher than the $1 to $3 per barrel pipeline fees. That is why Permian crude oil is trading for dollars less than the West Texas Intermediate (WTI) benchmark crude oil price. It is easy to see why the Permian energy producers are desperate for new pipelines to be built to transport oil and other energy commodities out of the Permian.
The energy midstream companies are moving in to build new pipelines and natural gas processing facilities. Natural gas from the wells must be processed into the natural gas used to heat homes and generate electricity, and into NGLs, which are used for a range of industrial purposes. It can take months to years for energy infrastructure assets to be built.
Here are three companies with a head start on their peers and when new Permian assets come on line with increase the dividends paid to investors.
Plains All American Pipeline LP (PAA) is a $16 billion market cap MLP focused on crude oil pipelines and terminals. Plains has focused on the Permian and is investing $1.3 billion in growth capital this year to expand its crude oil gathering and pipeline takeaway capacity in the Basin.
The company is expanding capacity on its Sunrise pipeline, which goes from the Basin to Cushing, OK. Also, the Cactus Pipeline from West Texas to Corpus Christi is being doubled with a second parallel pipeline. In total, Plains will increase its gathering and pipeline capacity in the Basin by 2.2 million barrels per day from the end of 2017 through the end of 2019.
Plains provides gathering, intra-basin pipelines, and long haul pipelines, which allows the company to often collect several fees on a single barrel of oil. This MLP restructured its finances in 2017, including a 45% distribution reduction.
In April, the company restarted dividend growth with a 20% increase.
PAA yields 6.3%.
Targa Resources Corp (TRGP) is a $9 billion market cap energy midstream company focused on the gathering, processing, transport and export of natural gas liquids (NGLs). These energy liquids are a big part of the value process of energy production in the Permian, North Texas and Oklahoma. Targa is a major NGL player in all three regions.
Management states that 75% of the company’s announced growth capital spending is going to Permian related projects. These include nine NGL processing plants and a new pipeline to move NGLs from West Texas to the Gulf Coast. Four new facilities will start coming online by the end of the 2019 third quarter and continue to start operations facility by facility through early 2020.
The company claims “line of sight” to strengthening dividend coverage in the second half of 2019. That should result in a stronger share price and lower future yield.
The shares yield 9.5%.
NuStar Energy LP (NS) is an MLP whose business operations are a balance of pipelines and storage facilities for both crude oil and refined energy projects. In May 2017 the company acquired an integrated crude oil and transport system in the heart of the Permian Basin. Throughput in the NuStar Permian system has increased by 194% since the acquisition.
The company forecasts throughput of 450 thousand barrels per day by the end of 2019, compared to 347 MMPD at the end of 2018. The company has initiated a joint venture new crude oil pipeline to transport oil out of the Basin.
NuStar also owns and operates an energy export facility in Corpus Christi, TX, which will be a strong beneficiary of growing Permian energy production.
In 2018, the MLP absorbed its publicly traded general partner, NuStar GP Holdings, LLC. The merger eliminated the general partner interests and added expense for the MLP. This should allow the company to increase distributions to investors at a faster pace.
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