Wide WTI-Midland spreads hit Permian producers

2013.02.07 - WTI MidlandEnlarge GraphOil and gas producers in the Permian basin in West Texas suffer when the price of Midland crude decreases relative to the domestic benchmark crude of West Texas Intermediate (WTI). This is because the price producers in the Permian realize on their oil is generally closer to the Midland crude price and when Midland crude prices decrease, they receive less revenue from the oil they produce. Some companies which this affects include Range Resources (RRC), Laredo Petroleum (LPI), Concho Resources (CXO), and EOG Resources (EOG).

Midland crude has historically traded in line with WTI, as seen in the below graph.

Enlarge Graph

However, recently Permian production has ramped up significantly with takeaway capacity development lagging. This means supply has built up in the Permian region, which has caused a price divergence between Midland crude (which is priced in West Texas) and WTI (which is priced at Cushing, Oklahoma). Companies in the Permian generally receive a price closer to Midland crude than WTI, so this price divergence has hit revenues.

From October through January, the spread widened significantly and will likely affect 4Q12 and 1Q13 earnings somewhat. Confirming this, Concho Resources COO Joe Wright noted on the company’s 3Q12 call, “One current situation we’re watching is the recent widening of the Midland-to-Cushing differential. I believe much of the current spread is a combination of scheduled refinery maintenance at the Phillips 66 Borger refinery and outages along the Northeast caused by Hurricane Sandy. Current shipments to the Northeast from regions like the Bakken are now heading to Cushing, so we’ll keep an eye on this situation and expect that there might be some impact to the fourth quarter realizations, but probably not enough to alter our 2012 annual guidance.” CXO recently reported that in 4Q12 it realized a price of $81.28/barrel for its crude, compared to the WTI price of $88.17/barrel.

Since mid-January, the spread has closed significantly. However, disruptions like that CXO mentioned on its 3Q12 call can have the effect of causing the spread to widen significantly again. Investors holding names with Permian exposure such as CXO, LPI, RRC, and EOG may find it prudent to monitor the Midland-WTI spread. Additionally, several names with Permian exposure can be found in the Energy Select Sector SPDR Fund (XLE).