Over the past several years, the US has been seeing large increases in oil production led by rapid development of the Bakken region in North Dakota and Montana as well as the Permian Basin in West Texas. The development of infrastructure has lagged the pace of oil production, which has bid up demand (and therefore the cost of takeaway) for existing infrastructure. This has caused some companies with operations in those areas to realize oil prices below the benchmark West Texas Intermediate (WTI) crude price, the crude most traditionally referred to when investors discuss US oil prices.
For example, Oasis Petroleum (OAS), a domestic upstream company with operations concentrated in the Bakken, reported in its last 10-Q that it realized average prices of $83.71/bbl in 3Q12. This is far below the average price of WTI crude of $92.20/bbl during the same period. Over the past year, the spread between Bakken oil and WTI was as much as $25/bbl, though it has closed dramatically (with Bakken crude even trading above WTI for a period) and the current Bakken benchmark is currently only ~$3/bbl below WTI. Changes in supply and demand dynamics as well as takeaway capacity could affect this spread. The Bakken-WTI spread is worth monitoring for companies with a significant proportion of production coming from the area, such as OAS, Continental Resources (CLR), and Whiting Petroleum (WLL). The chart below displays the WTI-Bakken spread over the past twelve months:
The other big oil growth story has been in West Texas, where the Permian Basin has seen a flurry of activity. This caused basis spreads between Midland crude (representative of West Texas prices) and WTI to blow out to $20/bbl in November of last year. Since then, spreads have compressed back to $2.00/bbl. However, future shocks like this could affect producers in the Permian, and one might expect to see this recent shock reflected in 4Q12 earnings. Some players with a large proportion of production coming from the Permian include Concho Resources (CXO) and Laredo Petroleum (LPI). The chart below displays the WTI-Midland spread over the past twelve months:
When choosing oil and gas investments, it is prudent to research if a company’s operations are concentrated in a specific location, and if so, what area. Certain areas can be especially sensitive to basis differential shocks as noted above, and in these cases it’s worth keeping track of not just WTI crude, but also the prices being realized in different areas of production.