Fracking has unearthed an ocean of crude oil from the various shale regions in the United States. That has sent prices for fuel down toward new lows, as refiners and end-users here in the U.S. have basically more than they can process.
There’s simply a glut of West Texas Intermediate crude oil — and even with production cuts, that glut isn’t poised to end anytime soon.
Those low prices are a big problem when it comes to profits for the various oil stocks. However, there is a glimmer of hope — namely, lifting the ban on crude oil exports.
A bill in the House of Representatives is set to clear the critical support needed to pass and lift the ban. Meanwhile, several other bills have been introduced, garnering support from both Democrats and Republicans.
At the end of the day, crude oil exports could be coming to a shale field near you — and that could push back the tide drowning oil stocks.
Ending the 40-Year Crude Oil Export Ban
Stemming from the 1970s Arab oil embargo, oil stocks are generally banned from exporting significant amounts of crude oil.
Current federal laws does give oil producers some wiggle room for exporting to nations with free-trade pacts with the U.S. The vast bulk of those exports have gone to Canadian refineries, pretty much right across the border, via railcars. Even then, we aren’t talking about a major amount — only about 27,600 barrels per month.
The problem is that even with recent production cuts, we are still churning out big-time amounts of WTI-benchmarked crude oil.
The U.S.-based refineries that are designed to handle the lighter sweet crude oil can’t use the stuff fast enough. So producers want to find those that can, and that means getting their product out into the international marketplace.
Since WTI is still trading below global standard benchmark Brent, the idea is that more international refiners will see the price difference and start buying WTI-benchmarked crude oil. That will boost sales for oil stocks, plus the increased demand should push up prices for oil overall. The discount would eventually disappear, and oil stocks theoretically would see their profits return once again.
So they’ve been lobbying, and lobbying hard — and those efforts may have finally begun to bear fruit.
Last week, the House subcommittee on energy and power advanced a bill on a voice vote to repeal the 40-year-old ban. The Energy and Commerce committee is scheduled to mark up the bill this week, with a vote coming at the end of month. According to aides for House Majority Leader Kevin McCarthy, the bill has garnered enough support to pass.
This follows moves the Senate made back in July. The Senate Energy Committee responded favorably to the Offshore Production and Energizing National Security Act of 2015. This act would also repeal crude oil export restrictions.
Given the support by several key Democrats — like Harry Reid — either bill has a good chance of passing.
And analysts believe a bullish crude oil export report from the Energy Information Administration would translate into a stamp of approval from President Barack Obama.
It’s not a perfect stamp as it does come with a bit of skepticism from the president. The White House recently announced that its doesn’t support the bill outright, but would refer the matter to the Commerce Department to make the final decision. Obama is basically passing the buck on oil exports so he won’t look like the bad guy if doesn’t pass.
The takeaway for investors is that several oil stocks would benefit from a lifting of the export ban. So … how can you position yourself for this change in the market?
Oil Stocks to Buy: Enterprise Products (EPD)
Midstream and master limited partnership (MLP) giant Enterprise Products Partners (EPD) could be one of the best oil stocks to buy ahead of the export ban being lifted.
Aside from owning miles upon miles of crude oil pipelines, the MLP has basically already positioned itself as an exporter.
Last year, it cut a deal with Pioneer Natural Resources (PXD) to export a type of light oil called condensate after it was ruled that the fuel could be shipped overseas.
Recent deals by EPD have only strengthened its exporting capacity in its terminals along the Gulf Coast and in Texas. And the real beauty is that the firm has the ability to basically “turn on” WTI crude oil exports at these facilities if the ban is lifted. Since these terminals are right near the Eagle Ford and Permian basins, EPD should see the lion’s share of offloading capacity.
At a price-to-free-cash-flow ratio of 63, EPD stock isn’t exactly cheap. However, it is trading for less than its long-term average.
And keep in mind, the MLP is one of the largest stalwarts in the midstream industry, so paying a slight premium is worth it — especially when you consider that juicy 5.8% dividend yield.
Oil Stocks to Buy: Continental Resources (CLR)
When it comes to production-side oil stocks benefiting from lifting the crude oil ban, Continental Resources (CLR) could be the biggest beneficiary.
Continental has the largest acreage position in the big, bad Bakken and is the number two producer of crude oil. The problem is that it’s 100% focused on WTI benchmarked production. Even rivals such as EOG Resources (EOG) have some Brent/International exposure.
CLR has been “humbled” by the continued lower price for crude, despite its great margins. That has caused it to cut capex spending for 2015 yet again.
The move is designed to make it cash-flow neutral — or, basically, spending what it brings in. However, any bump in WTI crude oil prices courtesy of exports will move CLR back into the positive cash flow side of things. That could send the oil stock’s share price surging back to its former glory days.
At a price-to-earnings ratio of 20, CLR isn’t super-cheap, but Continental does have the most to gain from rising WTI prices and a green light on exports.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
