Why Bakken's crude-by-rail transportation is here to stay

Part 3
Why Bakken's crude-by-rail transportation is here to stay (Part 3 of 7)

Why geopolitical reasons fuel Oasis’ crude-by-rail usage

Oasis Petroleum

Oasis Petroleum (OAS) is a major oil and gas company play in the Bakken region. It currently has an acreage of 506,960 net acres and its 1Q14 production was approximately ~43 MBoe/d (million barrels of oil equivalent per day).

Oasis Petroleum Bakken AcreageEnlarge Graph

It is important to note that in October last year, Oasis completed a $1.48 billion acquisition. In September, the company closed $63 million of acquisitions. The acquisitions came with 161,000 net acres, 9.3 thousand barrels of oil equivalent per day of production (as of September, 2013), and 45.7 million barrels of oil equivalent of reserves. Given the acquisitions, OAS provided a guidance range of 43–46 MBoe/d for 1Q14 and 46–50 Mboe/d for fiscal year 2014.

OAS’ Average Daily ProductionEnlarge Graph

OAS continues to rely heavily on crude-by-rail to support its production growth

As discussed in the previous sections in this series, crude oil produced in the Bakken area historically sold at a discount to the West Texas Intermediate (or WTI) crude (also referred to as “price differentials”). With the coming of rail, these price differentials began to narrow. In its 10K, OAS mentions that,

“In the third quarter of 2012, our average price differentials relative to WTI began to narrow, primarily due to transportation capacity additions, including expanded rail infrastructure and pipeline expansions, outpacing production growth. In the fourth quarter of 2012 and into the first quarter of 2013, average price differentials continued to narrow, primarily due to our ability to access premium coastal markets by rail.”

Oasis Petroleum’s crude oil gathering infrastructure relies heavily on its rail infrastructure. OAS currently has seven different rail connection points.

OAS’ Crude Oil Gathering InfrastructureEnlarge Graph

Geopolitical reasons provide further advantages to producers transferring crude to coastal regions

OAS’ dependency on rail isn’t likely to change because an added benefit of transporting crude to coastal markets provides OAS with the advantage of trading at a premium over the WTI. The coastal regions follow the Brent crude benchmark price. Brent, an international crude benchmark, is currently trading higher than the U.S. benchmark. Although both the benchmarks have been increasing on the back of the Iraq turmoil (read Must-know story: Why turmoil in Iraq is affecting energy stocks), the Brent is increasing at a faster rate than the WTI. International prices would be affected more by supply disruptions in the Middle East.

Due to geopolitical reasons and also to utilize the cost advantages of transporting to the East Coast and Gulf Coast, OAS is likely to continue to resort to crude-by-rail in the coming years.

OAS’ Takeaway CapacityEnlarge Graph

In the graph above, we can see that dependency on rail transport is higher compared to pipelines for the period 2014–2016. It’s clear that crude-by-rail for OAS is an option that is here to stay. Exchange-traded funds (or ETFs) that include OAS are the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the Market Vectors Unconventional Oil & Gas ETF (FRAK), the Vanguard Energy ETF (VDE), and the  iShares U.S. Energy ETF (IYE).

Continue reading the next sections in this series to learn about other producers that have benefited from crude-by-rail.

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