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Buy oil in Midland - truck it out - profit?

2,890 Views | 24 Replies | Last: 5 yr ago by Gordo14
chris1515
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AG
Disclaimer: Other than what I've read in a couple of articles...I know almost nothing about this topic.

Educate me on how this would work, or not...

From what I've read, oil production in the Permian Basin is going gangbusters. However, oil pipelines to pump that out have not kept up. So you have a lot of oil that can't move to market through pipelines.

This article implies the discount for oil that is "stuck" in Midland could grow to $20 a barrel. (there's a term for this stuff...heard it a lot in the context of tar sands in Canada and Keystone...I can't recall the term though)

https://oilprice.com/Energy/Energy-General/Permian-Discount-Could-Rise-To-20-Per-Barrel.html

Quote:

The lack of resolution for takeaway capacity will mean the painful discounts that shale producers are starting to see will stick around for a while. "We continue to see Permian oil prices of around $50/bbl in 2Q/3Q 2019 and a discount to Gulf Coast prices of around $19-$22 per bbl in 4Q18-3Q19," Goldman wrote.

A semi-tanker can hold 200 barrels.

Quote:

a single tank trailer only holds about 9,000 gallons or 200 barrels, a little under a third of a rail car.

https://www.forbes.com/sites/jamesconca/2014/04/26/pick-your-poison-for-crude-pipeline-rail-truck-or-boat/#6962ee4917ac

So, if a person bought 200 barrels of oil in Midland at a $20 discount for what it's worth in "Houston"(?). Drove it 500 miles to Houston and sold it for market rate. Wouldn't they have potentially big profits?

200 barrels x $20 discount = $4,000
- fuel costs of ($3/gallon of diesel for 1000 miles round trip at 5 mpg) -$600
That's $3,400 left to cover truck, labor, overhead, etc. for each trip.

What am I missing?
Ulrich
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It's worth running down whether you can make money, but it's also widely discussed in the industry so don't go in thinking that you can just show up and make money. You'll need some sort of edge, but if you have one it could be temporarily lucrative

1. Truck loading capacity; is there unused terminal capacity in place?
2. Scarcity of drivers, they are making 6 figures right now in the Permian and hard to find
3. The takeaway constraints go away in 2019, so it's a temporary business
RK
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AG
Quote:

What am I missing?


the actual cost of the items in the last line.


and, if things go as projected, you've got about 18 months before there is a pipeline capacity surplus.
Ulrich
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One of the biggest things is going to be amortizing the cost of the trucks and trailers. Odds are you have 18-24 months before the diff closes. If those are all highway miles you'll be able to get some salvage value but if you're picking up at the wellhead they are going to be beat to hell.

Maintenance on the trucks, see highway vs oilfield above

Insurance

Traffic congestion in west Texas could slow you down and raise costs

If you're loading/unloading at terminals there will be fees.

Carrying cost of the crude, you'll be tying money up 10,000 dollars at a time in the cargo

You'll need the proper licensing for hauling crude
leoj
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AG
You cannot find a driver to do this for a rate where you will make money and can still utilize them on a constant basis right now.

If you buy equipment and drive yourself you have 2 years before the oil companies increase pipeline capacity.
spence10
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AG
Ulrich said:

It's worth running down whether you can make money, but it's also widely discussed in the industry so don't go in thinking that you can just show up and make money. You'll need some sort of edge, but if you have one it could be temporarily lucrative

1. Truck loading capacity; is there unused terminal capacity in place?
2. Scarcity of drivers, they are making 6 figures right now in the Permian and hard to find
3. The takeaway constraints go away in 2019, so it's a temporary business



Depending on your start up dates for the new pipelines, the takeaway constraints go away in 3Q19 - possibly as late as 4Q19. Not as short term as many in the industry are saying.
Ulrich
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That's exactly as short term as everyone in the industry is saying. 3Q19 ends in 18 months.
Furlock Bones
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AG
you can haul about 180 bbls per truck. a bit more with an overweight permit. but with the long hauls from Midland/Delaware basin, you only get about 100 bbls per day per truck especially since drivers can't cheat on hours anymore with all of the electronic supervision.

companies are doing it yes.

but, there's a whole a bunch of logistics, regulations and other stuff not in your equation.

i'm in the industry. trust me, if i felt like there was money today jumping into trucks, i would. but, trucks have the lowest barrier to entry which means every tom, dick and harry will jump in as well.
aduey06
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Biggest thing is contracts and logistics. Producers are looking to move 20000 BPD not 200. I think the costs in the labor and maintenance are more than you think. You also have a lost day traveling back from Houston.

It would be interesting to see at what price do you have a caravan of oil haulers from Midland to Houston. I would not want to be anywhere near the roads.
TennAg
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mhayden
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A big issue you will also have to deal with in selling gasoline is the wildcard.
chris1515
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AG
Thanks for all the info. This wasn't something I was considering, but wondered what all would be involved.

As for deadheading back from Houston. I think you could swing by the gulf and pump a trailer load of water to haul back and sell for fracking...right?
spence10
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AG
Ulrich said:

That's exactly as short term as everyone in the industry is saying. 3Q19 ends in 18 months.

1+ years of blown out diffs that will recover only once pipe gets laid with no operational issues can potentially be much longer than 18 months of pain. Really just depends on how bullish you are the pipelines will get up and running and how you define "short term."
TxAg20
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AG
Plains did this a few years ago when the Mid-Cush blew out. They think their cost was $10/bbl to haul from Midland to the coast. If Plains can do it for $10/bbl, most can probably do it for $7.

The takeaway capacity shortage is a perception and not currently a reality. It's enough of a perception to blow out the diff, but I haven't talked to anyone who is not getting their barrels moved. Many believe that increases in production will soon cause production to exceed takeaway capacity, but we're not quite there yet. The forward Mid-Cush strip looks bad, but I haven't seen the front month get over $10. The widest diff right now is November '18 at $16.27. Today the diff is $9.18 for June '18. If your all in cost is $7/bbl you're going to make about $392/load. A load size is typically 140 bbls plus the oil gravity. That would make a load of 40 gravity oil 180 bbls. You're going to need special tanks to haul gravity much higher than 40 as the higher gravity oils evaporate easier. Assume 1 day to Houston loaded and one day back to Midland empty and you're making $196/day after expenses. That $7/bbl likely includes paying the truck driver, so you can make more if you're driving the truck yourself. However, you're unlikely to find an operator willing to sell you 180 bbls of oil every other day for a 1 man operation.
Ulrich
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Gotta look at Cushing-MEH, too. Pipes from Cushing to the coast are pretty full, too.
Ulrich
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I'm not sure what your point is. OP, RK, and I all said 18-24 months and you "well actually"-d us that we're being overly optimistic but you used a 15-21 month time frame which is shorter than what any of us said.

Certainly there can be delays, that's why I said 18-24 instead of 15-18 like the project schedules indicate. There are also brown field projects, mostly DRA, pressure increases, and rail terminals but maybe a reversal or two, that will help on a shorter timeline so there is upside risk as well.
Gordo14
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Ulrich said:

Gotta look at Cushing-MEH, too. Pipes from Cushing to the coast are pretty full, too.


I mean that's already reflected in the WTI to Brent price diff. I wouldn't think that the midland to Cushing differential reflects too much of that... I can see it a bit - but as I said midland basically gets 2 differentials - 1 to Cushing and another to the coast.
JSKolache
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AG
You're missing that no refinery or export terminal wants 1000 trucks sitting outside waiting in line. Shippers will run trucks when they have to, if they money makes sense, but usually to a rail terminal somewhere when they can transload to railcars.

Also, any trucker worth his salt will be offered 3x wages by frack and/or sand companies and will quit your long haul job in the first week.
tford12
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AG
GE
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AG
I think you're a little late to the party. Start this venture a couple years ago and you would have probably been onto something, but people currently are building out infrastructure like crazy.
fairviewcrew
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Here is some math based on buddy who has a trucking company....

Truck + trailer: $200k

Cost of driver: $40/hr ($50/hr if you throw in benefits etc)

Truck capacity: 170-180 bbls

4.5 mpg fuel efficiency

Other costs: can be up to $80k/yr to keep a commercial truck running between tires / oil / maintenance

Say you are making the trip to the Eagle Ford to get to corpus on a pipe. So you would have to pay a few bucks per barrel to get to Corpus

You will get one load a day.

By my math it's $10/bbl cash cost (obv more with depreciation). My buddy who has a trucking company says the cost is really $15/bbl

Spread is $16 right now - so let's take the midpoint of cost spread and say 12.50, so $3.50/bbl spread on 170 bbls.... making $600/day. That is a one year pay back on your equipment assuming you could be on the road 90% of the days. Obv if spread is higher it would be faster...

Some what ifs: what if EPD switches a ngl pipe to crude (potentially 2Q and 200 mbd) or expands seaway (100-200 mbd this year) and you don't see >$20 diffs

I do think there will be some trucking companies that can / will make the math work on existing equiptment - but a lot of those guys are making $2/bbl gathering at the lease and making 3-4 trips per day, so the incentive to switch to long haul not very good at the moment.

The math on doing new equiptment not great... but if you do it and diffs really are 20-25 for a year, it's great. Obviously that's where the risk is... fortune favors the bold.
fairviewcrew
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Oh and mid-Cush diff just tightened by $3 today.... will probably be back out in a few days. Always acts very funky around nomination process
halfastros81
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AG
I'm no Permian expert but have read that associated gas export capacity is a bigger long term issue than oil . If
You can't move the gas, flare it,
Or reinject/store it then you can't produce the oil.

I dunno if this is a real issue or it just made for a good article.


Gordo14
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halfastros81 said:

I'm no Permian expert but have read that associated gas export capacity is a bigger long term issue than oil . If
You can't move the gas, flare it,
Or reinject/store it then you can't produce the oil.

I dunno if this is a real issue or it just made for a good article.





From what I'm hearing (I'm new here), new regs are going to make flaring a lot less of an option. I can see gas injection become more of a thing, but that has a price and certain other consequences as well - some positive, some negative. I definitely think long term, has will be a bigger issue than oil - that's for sure. But I don't think the oil takeaway capacity will fully be resolved either. Why? Because if everyone is making 90%+ ROR on new drills, I feel like the market will eventually have to correct for that. 90%+ RORs aren't sustainable because they will always fuel aggressive investment which leads to over expansion. After a relatively short amount of time, if the global market can take the added oil from midland, then infrastructure will have to be a limitation or vice-versa.

If that's an eventual outcome, I wonder if natural gas prices will have to go way negative at least in midland (if you can't flare) to prevent investment swamping takeaway capacity.

Maybe I'm wrong, but right now, it feels like we are making too much money for it to be sustainable. Maybe world demand growth is just that strong and nobody can ramp up to meet that demand like the Permian. We'll see.
Waltonloads08
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AG
TxAg20 said:

Plains did this a few years ago when the Mid-Cush blew out. They think their cost was $10/bbl to haul from Midland to the coast. If Plains can do it for $10/bbl, most can probably do it for $7.

The takeaway capacity shortage is a perception and not currently a reality. It's enough of a perception to blow out the diff, but I haven't talked to anyone who is not getting their barrels moved. Many believe that increases in production will soon cause production to exceed takeaway capacity, but we're not quite there yet. The forward Mid-Cush strip looks bad, but I haven't seen the front month get over $10. The widest diff right now is November '18 at $16.27. Today the diff is $9.18 for June '18. If your all in cost is $7/bbl you're going to make about $392/load. A load size is typically 140 bbls plus the oil gravity. That would make a load of 40 gravity oil 180 bbls. You're going to need special tanks to haul gravity much higher than 40 as the higher gravity oils evaporate easier. Assume 1 day to Houston loaded and one day back to Midland empty and you're making $196/day after expenses. That $7/bbl likely includes paying the truck driver, so you can make more if you're driving the truck yourself. However, you're unlikely to find an operator willing to sell you 180 bbls of oil every other day for a 1 man operation.
true, but its because they arent popping their DUCs, so takeaway capacity is absolutely constraining production at this point.

https://www.bloomberg.com/news/articles/2018-06-21/unfracked-oil-wells-growing-as-permian-pipeline-scarcity-worsens
Gordo14
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WaltonLoads08 said:

TxAg20 said:

Plains did this a few years ago when the Mid-Cush blew out. They think their cost was $10/bbl to haul from Midland to the coast. If Plains can do it for $10/bbl, most can probably do it for $7.

The takeaway capacity shortage is a perception and not currently a reality. It's enough of a perception to blow out the diff, but I haven't talked to anyone who is not getting their barrels moved. Many believe that increases in production will soon cause production to exceed takeaway capacity, but we're not quite there yet. The forward Mid-Cush strip looks bad, but I haven't seen the front month get over $10. The widest diff right now is November '18 at $16.27. Today the diff is $9.18 for June '18. If your all in cost is $7/bbl you're going to make about $392/load. A load size is typically 140 bbls plus the oil gravity. That would make a load of 40 gravity oil 180 bbls. You're going to need special tanks to haul gravity much higher than 40 as the higher gravity oils evaporate easier. Assume 1 day to Houston loaded and one day back to Midland empty and you're making $196/day after expenses. That $7/bbl likely includes paying the truck driver, so you can make more if you're driving the truck yourself. However, you're unlikely to find an operator willing to sell you 180 bbls of oil every other day for a 1 man operation.
true, but its because they arent popping their DUCs, so takeaway capacity is absolutely constraining production at this point.

https://www.bloomberg.com/news/articles/2018-06-21/unfracked-oil-wells-growing-as-permian-pipeline-scarcity-worsens


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