The North American Oil & Gas Industry is firing on all cylinders resulting in a glut of crude from the Northern U.S. Bakken shale play. Canadian oil sands have additionally swollen inventories and lowered U.S. Oil futures relative to Brent crude substantially. Canadian oil sands production is in essence isolated and priced at an average discount to Brent crude of approximately $23.50 per barrel throughout 2011.
Money is never left on the table in the Oil & Gas industry and this time is no different. It takes time to get the necessary pipelines in place to collect and distribute the immense new production coming online the Bakken and Canadian oils sands. Nevertheless, Enterprise Product Partners (EPD) and Enbridge (ENB) in a recent filing showed they were two weeks ahead of schedule on the planned reversal of the Seaway pipeline aimed at alleviating oversupply in the central United States. The project should be completed by mid-May.
New Production & Pipeline Global Oil & Gas Market Impact
Investors have been closely eyeing the startup of the pipeline, which will send crude to the U.S. Gulf Coast refining hub from the Cushing, Oklahoma delivery point of U.S. Crude futures. The earlier than expected reversal of the Seaway pipeline has triggered selling of the WTI-Brent spread. The new pipeline will unwind the discount in WTI by alleviating the glut and at the same time lower the price of Brent by increasing the supply of oil on the global market.
Who Stands To Benefit
This is a major game changer for the industry. The Alberta oil sands production could rise exponentially as new pipelines are brought online. Enbridge and Enterprise Products recently announced plans to create a pipeline system to transport oil sands crude from Canada to refiners on Gulf Coast. Enbridge and Enterprise Products plans to build a pipeline from Flanagan, Illinois to the Cushing storage hub. The pipeline would tie in to a current pipeline from Canada with access to oil producers in the Bakken shale such as Continental Resources Inc. (CLR). Continental is the largest Bakken producer run by Harold Hamm, who just happens to be Mitt Romney's energy advisor. The company stands to gain substantial profits as the glut of production dissipates.
Additionally, Enbridge has a plan to build a pipeline to take crude westward from Alberta to the Pacific Coast for export. Together these pipeline systems would produce substantial benefits for oil sands producers such as Suncor Energy (SU) and its oil sands partner Total (TOT). Suncor Energy is one of the leading producers in the region. Suncor pioneered the oil sands and recently joined forces with Total to reinvigorate its oil sands play. Analysts expect Suncor's oil sands production capacity to grow by 10% through 2020.
Oil & gas producers Suncor, Total and Continental should see a significant rise in profits as their production will now be available to a wider market. The downside is this may actually raise the price of oil & gas in the U.S. as much of the excess production will be exported. Pipeline companies Enbridge and Enterprise Product partners should be busy minting profits for the foreseeable future as well. In an investing environment where it's hard to attain visibility regarding future results, these companies would appear to have one of the clearest paths to profits and growth. There is no such thing as a sure thing. Nonetheless, the future of these companies appears bright.
Factors that may affect the performance of these stocks would be a dramatic economic downturn dropping oil prices or a sudden resolution of Middle Eastern turmoil evaporating the "Iran" premium. I do not see either one occurring anytime soon.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.