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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The problem is that the world population is out of control. It is great that production is increasing but I doubt is is increasing as fast as people keep pumping out babies and developing countries like India are using more energy now that they all of a suden have a middle class.
I am worried about my children's (only 2) future. The $hit is going to hit the fan within 10 years if we continue rely on oil. And right now there are no good alternatives.
William Hinkley Said
Evil Chris- Could you please name one specific site where there is a reported environmental issue from fracking or oil shale production.. Example of a specific;; name of a lake, county, state etc; or the name of a river, which county, state, etc; or a specific person's drinking water, their address, phone number etc; or a town's drinking water, name of the town, county, state, mayor etc. I really would like to see you give us a specific example instead of this nebular the sky is falling enviro-lingo that has been spreading lies for generations now. And then if you can give us an example, after that please tell us what kind of a vehicle you drive, and give us a log of the last 10 uses you had for that vehicle
Well I'll give you the 2 most recent that come to mind. 22,000 barrels of oil leaked into a lake in Alberta's Muskeg region in May 2012, is that specific enough for you? The leak in the pipeline went undetected for days. A year before that 28,000 barrels leaked from the Rainbow pipeline into Alberta's forests.
I drive a 2003 Grand Am, the last 10 places I went are work, groccery shopping and accross town to cut my parents grass for the last time this year. (they are getting up there in age).
So there you go I named 2, you can look them up. Oil companies may have lied to us as well as the enviromentalists, may have.
Mr. Jubak! You are brick and I have great respect for your stock savy. At the start of your article
"Ready for the US energy boom" you are saying saying that the gas and oil boom is going to keep
prices low for many years. I infer from this that you mean gas and oil prices. If that is what you mean you are in a somewhat vague contradiction with Dr. Kent Moors who is saying that because
of the ratio of oil returned from the well to the effective oil invested in the well has decreased from a value of approximately one hundred to a value of approximately three to five, the price of oil will
become quite high and will stay high. Currently the sources of oil are from low branches of the cherry tree and from the more exspensive shale oil and gas wells. Ultimately the sources of oil
and gas will be mainly from the shale oil and gas wells. I think you, Mr. Jubak, and you,Mr. Moors, should get together and figure out approximately how the price of oil and gas will vary
with the changing sources of the oil and gas, and then tell the public about it.
There will be no energy boom; the Obama Administration will put a stop to that. The EPA is out to stop drilling, mining, and refining/
Thus, no new jobs
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