Producers, Refiners Win With Wrangler

Includes: ENB, EPD, PWR, TRP
by: Mike Maher

After pushing back a decision on the Keystone XL pipeline to early 2013, it seems politicians in the U.S. do not want to risk alienating environmentalists or union members going into what is shaping up to be one of the most difficult elections (in 2012). While the delay is a negative for TransCanada (NYSE:TRP), oil producers in the Canadian oil sands, and Quanta Services (NYSE:PWR), who had been selected to partner in the construction of the pipeline, it does open the door for Enbridge (NYSE:ENB) and Enterprise Products Partners (NYSE:EPD) to get a head start on their Wrangler Pipeline joint venture.

The proposed Wrangler Pipeline will be a 500-mile liquid petroleum pipeline, running from an Enbridge Terminal at Cushing, OK, south to Enterprise's ECHO Terminal in Houston. A proposed second phase would link the ECHO Terminal with Port Arthur, Texas. The pipeline will have an initial capacity of 800,000 bpd and is slated to be in service about the middle of 2013, should regulatory approval and customer commitment permit. Recent comments out of Enbridge have indicated strong interest in the pipeline, making it likely that the joint venture will move past the planning stages.

While the Wrangler Pipeline will be an important link in the energy infrastructure of the U.S., it is not so large as to be game changing for Enbridge or Enterprise. The real winners of this pipeline will be North American oil producers, and the refiners on the Gulf Coast. The recent discoveries of shale resources in the U.S. have changed the energy landscape worldwide, and the U.S. infrastructure has been slow to respond. A flood of new production from areas like North Dakota has changed the dynamics of the U.S. market, which had been set up to bring oil into Cushing, OK. But increasing US production has led to a glut of oil in Cushing, leading to lower prices for West Texas Intermediate (WTI) compared to Brent Crude.

Producers looking to capture the Brent price, which is nearly $19 higher than WTI at the time of this writing, have been clamoring for a way to gain access to the Gulf Coast in order to take advantage of the higher Brent price. The Wrangler Pipeline will allow this to happen. Refiners on the Gulf Coast have been looking to be able to buy cheaper oil from the U.S., rather than paying higher prices and transportation costs for imported Brent. Both groups will see instant benefits from the Wrangler Pipeline offering a cheap way to move large amounts of crude out of Cushing, down to the coast. It may be almost two years away, but expect the Wrangler Pipeline to provide an instant boost to the bottom lines of US oil producers and Gulf Coast refiners.

Disclosure: I am long EPD.

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