Pipe Profits Into Your Pockets

by Aaron Levitt | March 19, 2012 6:00 am

It’s tough going for American drivers these days. The cost to fill up our tanks seems to be rising exponentially. According to AAA, the average price of regular gasoline is more than $3.80 per gallon[1], and some analysts predict we’ll eclipse the $4 mark before the start of the busiest driving season[2]. I personally paid $3.89 this morning.

But while political tensions in Iran and speculators have a part to play in the ongoing saga, they are not the only culprits.

Energy prices ultimately come down to infrastructure and logistics. A lack of pipelines and refining facilities compounds any geopolitical issues. This helps explain why gasoline is cheaper in the middle of the country than the northeast. For example, consumers in Wyoming are paying around $3.30 per gallon, versus $3.99 in Connecticut. And this continued pipeline inadequacy will continue to boost prices for drivers in the East.

However, not all is lost. For investors, playing the potential fixes to this problem could put enough green in their tank to cover rising gas costs — and then some.

It’s All About Infrastructure

Europe’s bitterly cold weather and various tensions in Iran and Syria have set the stage for short-term spikes in oil prices. Couple this with rising demand from emerging nations like China, and you have a recipe for sustained higher prices.

However, supplies in the U.S. remain relatively high. The hydraulic fracturing (or fracking) revolution has not only increased supplies of natural gas, but shale oil as well. The Bakken formation[3], across North Dakota and Montana, sits on a virtual ocean of oil trapped within the hard rock. The new drilling technology has allowed E&P firms to tap into the Bakken and begin extracting that bounty — so much so that there actually is a glut of oil currently sitting in the Cushing Storage Depot in Oklahoma. Prices for West Texas Intermediate (WTI) crude have fallen by the wayside in the wake of the glut.

This is where it gets problematic. Despite the abundance of WTI oil in Cushing, the United States doesn’t have any way of really accessing that crude in the key refining areas of the Northeast. Currently, the pipelines that connect Cushing to various refineries and ports are pointed toward the Gulf Coast. These lines originally were designed to move imported tanker oil north from the gulf into the Midwest. Turning a pipeline around is a laborious process, and while there are plans to reverse the flows, that still takes time. Likewise, TransCanada’s (NYSE:TRP[4]) approved southern leg of the infamous Keystone XL pipeline[5] is only now beginning construction.

The Keystone South approval prompted White House Press Secretary Jay Carney to release a statement saying, “Moving oil from the Midwest to the world-class, state-of-the-art refineries on the Gulf Coast will modernize our infrastructure, create jobs, and encourage American energy production” — but it still doesn’t help motorists in the Northeast. Currently, only one pipeline moves oil from the Midwest northward: the 5,500-mile Colonial pipeline. However, this line is inefficient, old and over-taxed.

Getting crude oil to the Northeast might not even matter if there is no place to refine the hydrocarbons. Sunoco’s (NYSE:SUN[6]) Marcus Hook refinery, along with a facility owned by ConocoPhillips (NYSE:COP[7]), are responsible for about half of all the jet fuel, gasoline and diesel produced on the East Coast. And both are losing tons of money[8]. Almost all East Coast refineries are built to “crack” only light, sweet oil (i.e. Brent crude). With Brent pricing being the global standard, it is more directly tied to those nasty geopolitical events and growing demand than Midwestern WTI.

Following Hess’ (NYSE:HES[9]) lead, Sunoco plans to exit and close these facilities. Conoco is expected to follow suit. Ultimately, drivers in the East will pay 5 to 10 cents more because of logistics costs related to getting refined gasoline from the Gulf or the Midwest.

Profiting From the Problem

Since many of us will be paying more to fill our tanks, it’s natural that investors might want to seek a way to get a little money back from the upcoming refining crunch. An easy way is through the United States Gasoline Fund (NYSE:UGA[10]). The fund tracks gasoline futures and has been steadily climbing as the price per gallon has risen.

Unfortunately, no major firm has stepped forward and proposed an east-west pipeline — most likely because many refiners can’t handle the heavier crude anyway. The previously mentioned Colonial pipeline is owned by a consortium of private firms, as well as Royal Dutch Shell (NYSE:RDS.A[11], RDS.B[12]). While I am enamored with Shell’s operations[13], this pipeline is such a small part of RDS’ overall business, it’s almost meaningless.

Better plays lie with pipeline duo Enbridge (NYSE:ENB[14]) and Enterprise Product Partners (NYSE:EPD[15]). The pair already have made plans to reverse the flow of the Seaway pipeline and enable Bakken shale oil to flow from Cushing to refiners in the Gulf. That’s big news, as the refiners along the Gulf Coast will require more oil to support gasoline demand in the East. The more liquid flowing through their pipelines, the more money Enbridge and Enterprise make.

A second play could be refiner HollyFrontier (NYSE:HFC[16]). The firm’s six operations are concentrated in Texas, Oklahoma, Kansas, Utah and Wyoming. By selling more gasoline in the East and using only WTI-priced crude, HollyFrontier should be able to increase its profits as it picks up the slack from the East Coast’s dwindling output. Unlike many refiners, HollyFrontier made about $1 billion in profit during 2011 thanks to its low-cost WTI feedstock.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/03/pipe-profits-into-your-pockets/

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