[Editor's note: This story was updated at 11:28 a.m. CDT June 11.]
Phillips 66 Co. formed multiple joint ventures (JVs) on June 10 to build pipelines set to transport crude oil from key shale plays to U.S. Gulf Coast markets.
The JVs are comprised of two, separate agreements—one with Plains All American Pipeline LP and the other with Bridger Pipeline LLC. The partnerships will ultimately provide oil producers throughout the Permian Basin, Rockies and Bakken plays access to multiple Gulf Coast destinations through the construction of two new crude pipelines: the Red Oak Pipeline system and the Liberty PIpeline.
Analysts with Tudor, Pickering, Holt & Co. (TPH) said the new Liberty and Red Oak pipelines beat out fierce competition but noted the new pipes are likely to keep inland differentials tight and Phillips 66’s spending levels elevated.
“Hats off to [Phillips 66] for getting these projects across the finish line against fierce competition from major midstream players,” the TPH analysts said in a research note on June 11. “We believe the keys to [Phillips 66’s] success include (1) supreme end-market flexibility for the pipes, including multiple refining centers and export docks and (2) creative partnerships that utilize assets already in the ground.”
The agreement with Plains will form a 50/50 JV to construct the Red Oak Pipeline system with initial service from Cushing, Okla., to the Texas Gulf Coast targeted for first-quarter 2021. The Bridger agreement is for another 50/50 JV, which will build the Liberty Pipeline to provide connectivity from the Rockies to Gulf Coast end-markets also beginning in first-quarter 2021.
The Red Oak JV will construct a 30-inch pipeline from Cushing to both Wichita Falls and Sealy, Texas, to access Permian crude via leased capacity on Plains’ Sunrise Pipeline system. From Sealy, Red Oak will have connectivity to both Corpus Christi/Ingleside and Houston/Beaumont end-markets through 30-inch and 20-inch pipeline segments. Phillips 66 is set to operate the Red Oak pipeline.
Phillips 66 will also operate and lead construction of the Liberty pipeline via its JV agreement with Bridger. TPH analysts estimate the 24-inch Liberty pipeline will transport roughly 350,000 to 400,000 barrels per day (bbl/d) of Rockies and Bakken crude to Cushing with additional connectivity to both Corpus Christi, Texas, and Houston end-markets via the Red Oak pipeline.
Construction of the Red Oak pipeline is expected to cost roughly $2.5 billion. Meanwhile, costs for the Liberty pipeline are projected at around $1.6 billion.
Plains will lead project construction of the Red Oak pipeline on behalf of its JV with Phillips 66. The company also recently agreed to form a JV with Delek US Holdings Inc. for the expansion of its existing Red River pipeline system that extends from Cushing to the Texas Gulf Coast.
TPH analysts said they believe Plains’ economics are likely “moderately better than JV level” as leased capacity from the Red Oak JV boosts revenue for little to no capital.
“Spend profile not yet finalized as some degree of project financing is likely but current requirements of $1.25 billion net capex, predominately in 2020 and 2021, wash out [free cash flow] generation in 2020 driving moderate degradation in financial metrics ahead of 2021 cash flow ramp,” the TPH analysts said.
In addition, the TPH analysts noted in their takeaways from Phillips 66’s latest pipeline announcements that they remain comfortable with an inland crude differential outlook that’s narrower than the futures curve.
“With Red Oak in the fold, we add up more than 5.1 million bbl/d of new pipeline capacity hitting the Gulf Coast in 2019-22, compared to TPH estimates of more than 4.3 million bbl/d of inland supply growth over the same time period,” the firm’s analysts said. “Our 2021-22 Brent-WTI forecast is $5-$6/bbl, shy of futures at $7/bbl.”
Each JV plans to hold a supplemental binding open season to be announced at a later date that will enable additional shippers to enter into long-term transportation services agreements, according to separate press releases issued by Phillips 66 on June 10.
Vinson & Elkins LLP advised Plains All American in connection with the formation of the Red Oak pipeline JV. The law firm’s corporate team was led by partner Doug Bland and associate Yianni Georgeton.
Emily Patsy can be reached at firstname.lastname@example.org.
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