Two Companies Refining their Eagle Ford Visions
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You can’t help being excited to see what’s going on in our domestic energy industry. For the first time in decades it’s beginning to look like we’re on our way to lessening our dependence on foreign oil, if not laying the foundation for a future energy independence day. While that day still is a long way off, new projects like the one Phillips 66 (NYSE: PSX) and Kinder Morgan Energy Partners (NYSE: KMP) just announced are another piece of that puzzle.
In the press release Kinder Morgan announced that they are going to build an additional 27 miles of pipeline to extend their Kinder Morgan Crude Condensate pipeline to connect into the Phillips 66 Sweeny Refinery. This pipeline will supply crude oil and condensate produced from the Eagle Ford Shale. While the $90 million project won’t be completed until the first quarter of 2014, it will be immediately cash flow accretive to Kinder Morgan unit holders.
The project will also benefit the shareholders of Phillips 66 as well as producers from the Eagle Ford. For Phillips 66 they’ll have enhanced access to price-advantaged Eagle Ford crude oil which will help boost their refining margins. It’s another step toward increasing the returns at their refinery business.
One set of beneficiaries that we can’t forget are the Eagle Ford producers. The first phase of the Kinder Morgan Crude Condensate pipeline which was ready for service beginning this June provided them access to the Houston Ship Channel. Now, they’ll have access to another attractive delivery point.
The Eagle Ford is emerging as one of the hottest plays in the country as it’s very rich in oil and NGL’s. Multi-national’s like Talisman (NYSE: TLM) have virtually abandoned their Marcellus Shale drilling program in favor of the Eagle Ford. They’ve increased their Eagle Ford capital budget from $350 million to $500 million because their acreage position is located in the condensate window of the play, which is much more profitable to drill than their dry gas acres in the Marcellus.
Phillips 66’s former parent Conoco Phillips (NYSE: COP) also has a strong Eagle Ford position. Their position is located right along the edge of the condensate/oil window. Because of the returns they are seeing from the play they’ll be spending $2.3 billion of the capital budget on the play.
Finally, one of the best positioned producers in the play is Chesapeake Energy (NYSE: CHK). They’re the second largest leasehold owner with a good portion of their acres in the middle of the oil window. They continue to shift their capital program to liquids production of the Eagle Ford and will spend 30% of their capital budget on the play in each of the next two years.
As in real estate, location is everything. Right now that location is the Eagle Ford and companies like Kinder Morgan and Phillips 66 are finding that they are in the right place at the right time. Meanwhile producers like Talisman and Chesapeake will have more opportunities to sell their products as projects like this one come online. Taken together, we as a nation can take one small step toward energy independence.
I was very skeptical of the spin-off of Phillips 66 from Conoco Phillips but the more I follow the newly public company the more I like what I’m seeing. They’ve been repositioning their lower return refinery business while growing their higher margin chemical and midstream businesses. This deal with Kinder Morgan is another step in the right direction for Phillips 66.
latimerburned owns shares of Phillips 66 and ConocoPhillips. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
