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“I’ve been through two oil booms and busts before” an old timer from Midland, TX told me, “so we’ll see how this [latest boom] goes.”
Midland, Texas is the home of the Permian Basin, a once prolific oil deposit, that’s now looking to be a prolific shale oil deposit. Over the past year the place has been booming with oil development.
The old timer’s comment got me wondering. Needing a little more perspective I asked, “When were those two other booms?”
“The first boom started around 1950” he said. “The second started around 1968, I suppose. But now, look at that oil price,” he paused and shook his head, “it’s over $100.”
Then without further questioning he gave this bit of perspective: “Back when I worked in the field I made $11 an hour, and that was with oil selling at $6 a barrel.”
“Now it’s over a hundred” he said “and my three grandsons are barely making $20 an hour. That doesn’t make sense to me (…still good I figure, those three boys have jobs.)”
Putting some perspective on the latest numbers I’m hearing out of the Permian Basin — where drill bits are spinning rigorously — the former rig worker is in for what may be the most surprising boom of his life.
But the old timer does bring up a good point. With oil prices steadily heading higher — where is all of that black gold money going? If his anecdote is any indication, it’s clearly not a direct 1-to-1 ratio going to rig workers.
How To Cash In On Texas Black Gold…
In today’s shale patch there’s a lot more technology being used to pull that oil up the well. Whereas an old gusher would give an owner 100-1 returns in 1950, the shale wells today are probably paying closer to 10-to-1 (over the life of the well.)
Much of the money is going to finding, stimulating and pulling the oil to the surface. Back in the 50’s you could stick a pipe in the ground and as long as you hit a sweet spot oil would freely flow. Today, there’s a lot more to it.
3D seismic is being used to understand the geophysics of a deposit. Horizontal drilling is allowing for more economic and productive wells. And hydraulic fracturing is allowing the oil to freely flow to the pipe.
Without all of these technologies and the companies that make them possible, this oil wouldn’t be flowing in the first place. So clearly a lot of money is heading towards the oil service companies and those that sell these high-tech drilling components.
These companies are set to do well over the years, as we’ve talked about before.
But there is another sector that’s set to do well with all of this oil and gas hitting the pipes — and it’s something you can be a part of.
“They used to be happy with a buck a barrel, but apparently that’s not good enough anymore.” I overheard in a conversation between a couple of old hands in the Permian oil patch. “Now they want $6” one exclaimed, “they’re taking all of the arbitrage for themselves!”
The two were talking about transporting oil from the booming Permian. With more oil coming online, oil pipelines are filling up and some transportation companies are making a killing.
They weren’t the only ones singing this song, either.
“The biggest problem is getting the oil out” says Scott Sheffield of Pioneer Natural Resources, one of the big Permian oil producers.
The Permian basin is becoming a glut of oil. And to put a fine point on it, at several different points on my latest trip to Texas I heard about companies looking into transporting oil by train.
You know the situation has gotten out of hand when guys in West Texas are thinking about transporting oil to Cushing, OK by railcar.
Plus, it’s only expected to magnify in the next few years. Pioneer’s Sheffield, talking to the crowd at the Developing Unconventional Gas conference in Fort Worth, TX, expects the horizontal rig count in the Permian to jump 60-70% in five years.
Indeed, the long-term outlook for pipeline players is up. Specifically, the midstream industry — pipelines, processing and other transport.
These are the companies that can transport oil and gas — and when prices are high, like today’s oil prices, they can demand higher “tolls” for the oil transport. In the case of the conversation I heard above sometimes these transport companies can take all of the juice for themselves.
With more oil (and gas) set to hit America’s pipeline system over the next five years — and for many years to come — this is a great long-term way to play America’s oil boom. Especially if you’re looking for steady income.
“You see, there is a huge upfront cost to put in a pipeline” our income export Jim Nelson says. “But after that’s built, there are very few ongoing costs. It’s almost all income…income directly from [oil] companies that need to ship their products.”
One company that has its hands in the Permian mix is Magellan Midstream Partners (MMP: NYSE). The company owns the rights to the Longhorn pipeline — from Houston to El Paso. And just last year announced that it would reverse the flow — now heading from El Paso to Houston and picking up some of the extra Permian production on the way.
Just as an example, Magellan pays nearly a 5% dividend. That’s a solid income play that could get much sweeter over the years.
Naturally, there are other pipeline players in the area too. All of which are worth a look.
With more oil set to come online in the next five to ten years — and contract negotiations always getting updated — now’s a good time to buy into this long-term, black gold trend.
Keep your boots muddy,
– Matt InsleySource: Daily Resource Hunter
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