Let’s not mince words. We have a lot of oil in the ground here in North America — a never-before-seen abundance, in fact. And as we’ve continued to frack, frack and frack some more, supplies of domestic crude oil have continued to outstrip domestic demand. In turn, oil stocks have been clamoring to send that bounty overseas to help create additional demand and ultimately boost profits.
But they couldn’t. A nearly 40-year oil export ban has prevented domestic oil producers from realizing their potential.
Two of the brightest prospects that have yearned for an end to the ban were midstream firm Enterprise Products Partners L.P. (EPD) and energy producer Pioneer Natural Resources (PXD). And now, with an agreement made to open up energy exports, EPD and PXD might finally realize this fantastic potential.
Investors should buy in now while they’re still beaten down.
Washington Throws Oil Stocks a Bone
Back in the 1970s and thanks to the Arab Oil Embargo, the U.S. government enacted legislation to keep as much of our crude oil here at home as possible. Producers were banned from sending raw, unprocessed/refined crude oil overseas. Oil companies didn’t mind while domestic demand was high, but in high-supply environments like the one at present — thanks to fracking and low demand spurred by energy efficiency — profits have been floundering.
Thus, many oil stocks have long lobbied for Washington to lift the ban and allow the companies to begin exporting anew.
These lobbying efforts have finally borne fruit, as this week, congressional leaders agreed to end the export ban as part of a spending bill that will help keep the government open through next September. Both houses must pass the bill, and President Barack Obama must sign it. But considering the specter of a government shutdown should the bill not pass, analysts believe the oil ban’s lifting is as good as done.
Which brings us to Enterprise and Pioneer.
EPD and PXD Build on a Partnership
Back in 2014, the federal government created something of a back door with regards to oil exports. They ruled that condensate could be exportable as it technically counts as a “refined product.” The light oil goes through a very simple process to be refined (basically distillation).
Pioneer Natural Resources produces a decent amount of that fuel via its acreage in the Eagle Ford and Permian Basins, and Enterprise Products Partners has some of the major terminaling and gathering assets in those regions.
The pair created one heck of a partnership.
Since the pair first hooked up, with Pinoeer allowed to use Enterprise’s terminals to begin exporting condensate, EPD has continued to beef up its presence in the region and actually purchased outright the bulk of PXD’s midstream and processing assets in the Eagle Ford. Pioneer has continued to use those assets in a sort of sale-leaseback transaction.
The lifting of the ban helps both Enterprise and Pioneer because EPD can flip the switch and basically turn on WTI crude oil exports at these facilities. The basic infrastructure is already in place, and pipeline expansions/capacity upgrades are a lot easier when existing systems are previously built. EPD already has plans to build a new pipeline that will tie into its current Eagle Ford system and send crude oil down to the critical Houston Ship Channel terminals. It’s just waiting for the greenlight.
And since its terminals are the prime channel ways in the Eagle Ford and Permian basins, EPD should see the lion’s share of offloading and export capacity.
As for PXD, the recently struggling shale producer will be able to now send its crude oil production through its partner’s pipelines and out to sea. Via its previous working relationship with Enterprise, Pioneer should be able to gain preferred access to EPD’s system ahead of its rivals.
The hope in all of this is that since WTI crude oil trades at discount to Brent, more nations and international refineries will choose the cheaper fuel. That should help push up prices.
Buy Shares in Both Oil Stocks
Ultimately, the pair is a great buy together.
EPD — with its huge stable of midstream assets that span the entire energy complex — can serve as the rock. Even with crude oil down, the vast bulk of its assets still function as tollways, and as a result, Enterprise sits back and collects fees from other oil companies using its system. That helps pay for a juicy 6.7% dividend yield.
On the flipside, PXD will be all about capital gains. Pioneer shares have suffered in the recent oil rout. However, if PXD is able to sell more crude oil at slightly higher prices, that will only serve to boost profits … not that it needs help on that front. When accounting for its hedge book, PXD is one of the few oil stocks out there that’s actually turning in profits.
Neither EPD nor PXD is cheap; Enterprise trades at 16 times next year’s earnings, while Pioneer is off the chart at a triple-digit forward price-to-earnings ratio. But you’re getting two of the premier plays in their respective industries (and the latter is swinging from estimates for a slight loss this year to a substantially larger profit next year), so a premium is warranted.
And with crude oil exports now coming down the pike, both EPD and PXD could see their estimates shoot through the roof.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.