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Holly Energy Partners, L.P. (HEP), HollyFrontier Corp (HFC): This Little Energy Stock Just Got Bigger

Typically when the Permian Basin makes it into the news, the focus is on one of the fields in West Texas — but not today. Today New Mexico is in the spotlight, as growing production in the Permian across the border has allowed midstream MLP Holly Energy Partners, L.P. (NYSE:HEP) to expand its crude oil capacity by 100,000 barrels per day.

The deal
Earlier this month, Holly Energy announced its plan to convert a refined products pipeline to crude oil service, and construct several new pipelines segments. It will also expand an existing pipeline and build truck unloading stations and crude storagecapacity. Capital expenditures are expected to reach $35 million-$40 million, and the line should be in service no later than 2014.

Beyond higher volumes, there is significant upside here. The deal expands Holly Energy Partners, L.P. (NYSE:HEP)’s customer base outside of its general partner, HollyFrontier Corp (NYSE:HFC). The

refiner currently contracts 100% of Holly Energy’s capacity through fee-based agreements. The fact that outside shippers have already committed enough volumes to get this project off the ground is important because it diversifies Holly Energy Partners, L.P. (NYSE:HEP)’s income.

The familial bond remains intact, of course, not only because HollyFrontier Corp (NYSE:HFC) owns a 44% stake in the MLP, but because there is a good chance that some of the oil will end up at its Navajo refinery in Artesia, N.M. The capacity of that refinery is 100,000 barrels per day, so it would be virtually impossible for HFC to take absorb it all.

Another look at the Land of Enchantment
Let’s get back to New Mexico for a second. Most of our “top oil-producing states” lists stop at five, which means the sixth-largest oil producer doesn’t get much attention. It is also the seventh-largest producer of U.S. natural gas.

The Energy Information Administration estimates that in November 2012, the most recent data available, New Mexico produced around 7.4 million barrels of oil, leaving it just shy of Oklahoma’s 8 million barrels.

As of 2011, the most recent full-year data that the state itself provides, Concho Resources Inc. (NYSE:CXO) and Occidental Petroleum Corporation (NYSE:OXY) were the largest oil producers, cranking out 13.7 million barrels and 6.2 million barrels of oil, respectively, in 2011.

Foolish takeaway
Both HollyFrontier Corp (NYSE:HFC) and Holly Energy Partners, L.P. (NYSE:HEP) have a significant presence in New Mexico. While Texas may get all the attention right now, expect to see production ramp up west of the border as well. The two Hollys and Occidental Petroleum are just a few of the companies that will benefit as producers hone their expertise in the Permian.

The article This Little Energy Stock Just Got Bigger originally appeared on Fool.com.

Fool contributor Aimee Duffy owns shares of HollyFrontier. Click here to see her holdings and a short bio. If you have the energy, check out what she’s keeping an eye on by following her on Twitter, where she goes by @TMFDuffy. The Motley Fool has no position in any of the stocks mentioned.

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