Replies to post #5225 on The Rising Influence of Rising Affluence

[DewDiligence]

[Bakken] oil is sold at a large discount to a dropping price for WTI.

In 2011, we discussed a claim by John Hess that HES’s Bakken oil was getting a premium to WTI (#msg-62546000, #msg-62518973 [second bullet from bottom]). Is it no longer possible for such a premium to occur, even on an intermittent basis?

[dewophile]

hess

hi sorry for the late reply i have been away on vacation

But at the moment, Bakken production as a share of total production, is more of a problem than an asset because that oil is sold at a large discount to a dropping price for WTI.

this is not as big a problem for hess as it is for other bakken producers because they have their rail infrastructure to deal with the glut in the bakken. on the last cc they mentioned they are shipping 25 or 27 K barrels a day and it will be over 50K by year end - which should account for 3/4 or so of their bakken output

in fact i thought long and hard about this issue (bakken glut) before buying the stock. i had been folloiwng MRO closely too and was seriously thinking of taking a position - as you know they have a strong position in the eagle ford with easy access to gulf refiners. in the end i bought hess in part because they will be able to get premium pricing for most of their bakken production and the valuation seemed a bit better (i find the companies comparable in that both are more levered to brent at present, but have most of their growth tied to us onshore production via unconventional plays).

[DewDiligence]

SeekingAlpha piece discusses technical changes in HES’s Bakken drilling:

http://seekingalpha.com/article/722661-bakken-update-hess-has-made-a-big-change-to-its-completion-design

I don’t understand what the author is talking about, but maybe Charlie, or someone else who reads this board, does. T.i.a.

[DewDiligence]

Bakken crude fetched a premium to WTI in September; good for HES (among others):

http://online.wsj.com/article/SB10000872396390443635404578036631081423440.html

The average Bakken discount since November 2011 was $7 below U.S. crude benchmark West Texas Intermediate, and reached $28 in February, according to Platts data. But in September, Bakken oil prices traded at a premium to WTI for the first time in nearly a year, and some analysts say the premium could continue for another year.

…Much of the credit goes to the newly developed system of rail lines and terminals built by Tesoro Corp., EOG, Statoil, ASA and others, which have started hauling the crude from its geographically isolated source to refineries all over the country.

… Oil production from the shale formation reached 675,000 barrels a day in July, an all-time high and more than twice as much as could be carried by pipeline, according to the latest data from the North Dakota Department of Mineral Resources.

But as more rail lines and terminals have been built in North Dakota and surrounding states, Bakken oil has still become available to more buyers, boosting its price. Statoil said in August it is leasing more than 1,000 railroad cars to carry crude oil from North Dakota to refiners across North America. Railroad crude-takeaway capacity has more than doubled in the past year, to about 400,000 barrels a day…

[DewDiligence]

Oil-benchmark factoids—Average 2012 prices of Brent, WTI, and Clearbrook, MN (benchmark for Bakken oil not shipped by rail) were $112, $94, and $88, respectively:

http://online.wsj.com/article/SB10001424127887323854904578264134209475820.html

[DewDiligence]

Canada oilsands discount to WTI benchmark has narrowed from $40/bbl to $18/bbl due to new pipelines:

http://online.wsj.com/news/articles/SB10001424052702303417104579546092181949408

Traders say a gap of about $20 is right, given that WTI is a higher-quality grade of oil and doesn't need to be transported as far to U.S. refineries.