11/19/2012 8:45 PM ET|
Ready for the US energy boom?
The US is seeing an oil and gas revolution that promises to keep prices low for years to come. Here's how to invest in the trend.
Five years ago, I never imagined I'd type these words: By 2017, the United States will overtake Saudi Arabia as the world's largest oil producer.
In addition, according to the International Energy Agency, by 2015, the United States will overtake Russia to become the world's largest producer of natural gas.
The United States is now the fastest-growing oil and natural gas producer in the world. During the past five years, according to Citigroup, the United States has added 2.59 million barrels a day to total production.
You'd think there's an investable angle there somewhere.
I can think of four:
- First, the stocks of the companies responsible for this huge surge in U.S. production.
- Second, the stocks of the companies that will make money from solving the current bottleneck in getting this supply to market.
- Third, the stocks of companies that will benefit from the long time frame of this trend. The trend is likely to stretch on for a decade or two -- with a likely extension past 2030 as supply from Canada and Mexico increases. This will drive North America as a whole toward energy-self-sufficiency projects with long time lines that had been discounted on the risk that the boom would be over before they were completed.
- Fourth, the sectors in the U.S. economy that will reap benefits from lower U.S. energy prices, beyond the general advantages flowing to the U.S. economy from lower energy costs.
Let me start with the general picture and then move to individual sectors and trends.
What changed the picture
I don't think it's overstatement to call what we're seeing now "the shale revolution." Higher oil and natural gas prices met up with the maturing of technology pioneered in the 1970s to send oil production soaring. The new production is coming from shale formations that, until the development of new technologies for hydraulic fracturing (fracking), were thought unlikely to ever give up their oil content.
Not so long ago, the U.S. energy story was about an apparently irreversible decline in production from the big oil states of Alaska, Texas and California. Production from Alaska, for example, peaked at 2 million barrels a day in the 1970s. Production in the state ran at 567,481 barrels a day in March 2012. Production from Texas and California was falling as well.
Nothing shows the reversal in the trend more starkly than production figures from North Dakota. With 6,336 wells now pumping, oil production from the Bakken and Three Forks shale formations in North Dakota climbed to 575,490 barrels a day in March 2012 from 118,103 barrels a day five years earlier. That put North Dakota ahead of Alaska -- with its March 2012 production of 567,481 barrels a day -- and moved North Dakota into second place among U.S. oil-producing states. North Dakota now chases only Texas, which is seeing its own oil-shale boom turn projected production declines into production increases. Oil production in Texas climbed 12% from September 2011 to March 2012 to 1.72 million barrels a day.
The boom companies
The shale revolution wasn't led by Big Oil. To take one example, the key technique known as "slickwater fracturing" was pioneered by Union Pacific Resources, now part of Anadarko Petroleum (APC), and Mitchell Energy, now part of Devon Energy (DVN).
Big Oil has, in fact, been playing catch-up by buying acreage from smaller oil producers or buying the small producers outright. For example, Exxon Mobil (XOM) bought 196,000 acres in the Bakken formation from Denbury Resources (DNR) for $1.6 billion.
The problem with these deals, if you're an investor, is that they aren't big enough to move the needle at Big Oil. Take Royal Dutch Shell's (RDS.A) purchase of acreage in the West Texas Permian Basin from Chesapeake Energy (CHK) in September for $1.94 billion. That acquisition tripled Shell's production from unconventional sources and marked a major milestone in the company's march to have 250,000 barrels a day in worldwide production from shale by 2017. Even if the company hits that goal, shale would still make up just 6% of Shell's forecast 2017 production.
No, as I have written earlier -- as early as Oct. 21, 2011, in this post on Big Oil snapping up smaller players -- if you want to buy producers to take advantage of the U.S. oil boom, it's better to buy the small companies that staked out big acreage early. Names like Pioneer Natural Resources (PXD) and Concho Resources (CXO) might be familiar, since I've owned them on and off in my Jubak's Picks 12- to 18-month portfolio.
Pioneer is also currently a member of my long-term Jubak Picks 50 portfolio. The stock is up 5.28% since I added it to that portfolio on Jan. 13, but it's down 9.2% from its Sept. 14 high on worries about the global and U.S. economies. Concho Resources is down 12.3% since I sold it on May 21 at $90.26 for the same reasons. Other names to look at include Oasis Petroleum (OAS), Devon Energy, Rosetta Resources, (ROSE), EOG Resources (EOG) and Approach Resources (AREX).
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Chicken or the egg. Prices have to be high or you can't afford to frack. Can't frack if oil isn't expensive. Can't mine oil sands either.
If people think the price of gasoline is going to go down just because it's american oil, think again. It will be sold at the global price to the highest bidder. The oil companies are not in this to make us energy self-sufficient, they are in it to maximize profits. That's how capitalism works. All those pipelines run downhill to portside refineries that are ready to load it on tankers to china. These new technologies are not really increasing the amount of oil globally, they are just changing who is providing it. With prices where they are, it's just become economically and politically viable to frack.
Jubak is correct in that the companies leading this new oil rush could do well which is the point of the article I suppose. We will also create some jobs here at home too which is a positive. It will also crush green energy for a while which is a worry but history has shown that we will not embrace green energy until it becomes economically advantageous. Big energy wants to stay competitive or they go bye bye.
If they really wanted to lower our transportation costs they would be pushing CNG and building the infrastructure for it. That would lower the demand for oil though so you would stop the oil boom in its tracks. Why would the oil companies spend all that money on infrstructure just to compete with themselves? Why should the government spend money on the infrastructure just so the oil companies can make more money? Quite a pickle Neo.. I guess we are lucky that they own it all so they can control it in a way that's best for us. Right.
We all need to remember how this works when the oil companies ask for a pipeline from North Dakota (or Canada) to New Orleans. Who does that really help? If it lowers my fuel price I'm on board, if it makes it cheaper for them to ship fuel to China forget it. Good luck getting an honest answer to that question!
I think the article makes some good points. Like many of Jim's articles, there is real industry and corprate level analysis, rather than a bunch of macro economic opinion.
Unfortunately, it's the latter that rules today. The price of oil in the future will be determined more by the number of dollars printed out of thin air by the Federal Reserve than anything the oil industry does.
What a crock of sh**. Any oil the US can and will get from domestic sources will cost more to produce...take more energy to get it....than we get from it; a way way WAY upside down energy equation. Certainly there is oil to be squeezed out of rock, sand, and coal tar but the environmental costs will be great. The notion that lower costs will be associated with this energy clusterf*** is just not possible or at the very least, sustainable.
I really don't know where you get this stuff. You are confusing the reader by talking about oil production like it was oil prices. Oil prices had to go up for oil companies to resume oil production, otherwise this new "boom" (which it is not) would not have been feasible.
Of course oil production in the U.S. is going up, mainly because oil production is going down in places like Saudi Arabia as their fields have started to decline.
All this talk about another oil "boom"in America is pure propaganda. Oil consumption by emerging economies like China and India are competing head-on with demand by the U.S. and Europe.
Also, the Alaskan fields are reaching the end of their useful life. Some time in the near future flow won't be enough to push oil through the Alaskan pipeline. What is currently coming down the pipeline is high in water, which freezes in the Alaskan winters. And at present, there isn't enough reason to update the pipeline or justify heating.
Also, the Canadians are getting seriously worried that the U.S. is going to start treating their oil like its U.S. Oil. The old Monroe Doctrine rearing its ugly head is very scary to the Canadians.
So, like tell it like it really is. And stop it with the propaganda.
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