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Too Much of a Good Thing: WTI-Midland Trades at a Discount to the Gulf Coast

By Peter Staas on Apr. 9, 2018

More recently, surging production growth from the Delaware and Midland Basins have butted up against existing pipeline capacity, blowing out the price differential between West Texas Intermediate in Midland and Louisiana Light Sweet on the Gulf Coast.

(Click graph to enlarge.)
WTI vs LLS

Lower price realizations, coupled with price inflation in the services segment, will hit the returns generated by oil and gas producers in the Permian Basin, especially those that lack scale and/or sufficient takeaway capacity.

One of the reasons we have focused on Concho Resources (NYSE: CXO), WPX Energy (NYSE: WPX) and Occidental Petroleum Corp (NYSE: OXY) is for the pipeline capacity they have secured to move barrels to the Gulf Coast.

Enterprise Products Partners LP’s (NYSE: EPD) Midland-to-Sealy pipeline came onstream earlier this month, but exploration and production companies will need to wait until 2019 for a significant increase in takeaway capacity.

Whereas these widening price differentials create challenges for oil and gas producers in the Permian Basin, refiners in the region stand to benefit from their ability to source discounted crude oil and sell gasoline and refined products at higher international prices.

Andeavor (NYSE: ANDV) offers exposure to this tailwind after acquiring Western Refining, but Delek US Holdings (NYSE: DK) offers the most leverage to this trend after rolling up Alon USA Partners LP (NYSE: ALDW).

We would also expect Plains All-American Pipeline LP’s (NYSE: PAA) oft-maligned marketikng division to benefit from arbitrage opportunities created by this widening price spread.

 

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