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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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
That's pretty much the story of it.
That's how inflation works. Something becomes a shortage and the price goes up according to "market" conditions and when the crisis is over, the customers become accustomed to the increase and becomes satisfied if the price just stays the same, until the next shortage and then it repeats.
I've got another investing angle: The stocks of companies involved in cleaning up the pollution from the energy boom. Or will that be left for government and the taxpayers to deal with?
What a desperate bunch we are, creating all sorts of ways to get oil and gas thousands of ft below us. Seems like we won't stop until every crap a dinosaur ever took is burned off in an SUV taking the kids to (insert sport they play here) pratice.
In Canada we have had this energy boom for 15 years. It created a lot of jobs for 1 part of the country. As our currency rises with the price of oil the eastern half of the country has seen it's manufactoring base destroyed in part as the higher dollar made them much less competetive. Rivers and lakes around the oil sands as well as the air around them get more and more clogged with crap every day. We pump pressurized gas and water underground to force up oil creating huge underground cavities and strip mine entire areas but we keep on chugging along.
Good or bad Sept. 11 means an energy boom is here. Good or bad...................
by up all the small shale properties and invite millions of small investors to invest. That should bring in enough to setup the infrastructure to begin production. The big players(current greedy oil companies) forget them. Dont be gutless. Go for it and do it. Oil, gas, and solar will free us finaly from saudi oil, and our own greedy oil companies, who have been in secret greedy corruption with our Politcians long enough. WE ARE IN A NEW ERA OF POLITICAL AND SOCIAL DEMANDS.
POLITICAL: FOR POWER AND SELFISH CONTROL, SOCIALISM
SOCIAL : FREEDOM OF SPEECH, SEXUAL PROMISCUITY, SAME SEX MARRIAGE, YOUNGER GENERATION OF LAZY SPOILT SELFISH PUNKS, MOVIES AND COMEDIANS LIBERALISM THAT PROMOTES CHANGING THE LAW OF GRAVITY.
The amazing thing about all this, is that they actually THINK they can ALTER THE LAW OF GRAVITY BY SIMPLY VOTING ON IT HA HA HA HA HA HA AHA HA HAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
Fosz, you say the only people benefiting from oil production are the people in control of the flow of oil.
Tell that to the people with $100,000 a year jobs in the Dakoatas and all the related supplier jobs!
Sure the only person benefiting from the Iphone is Steve Job's estate. Ayn Rand was a prophet. This stupidity is just that stupid. Heck we don't need any business, Iphone and gasoline just falls from teh sky and some evil person picks it up and makes us buy it. God Help Us is right.
Just yesterday Miryahdi ..sp was saying how we were going to feel more pain at the pump. Today we have an energy boom. I guess they are not mutually exclusive.
Government, the oil companies, and the auto industry all have a target cost per mile that the public will pay. As we have exhausted our oil, government has dictated higher mpg fleets and the automakers have obliged. The auto makers like it when fuel goes up because it makes you go out and buy a new car. The governemnt likes it because they get to tax the whole show. The oil companies get to keep chugging along making efficient use of their expensive infrastructure. (No big refineries have been built since 1977 but that's for another day)
What they all don't like is when we stop (or reduce) driving. The whole machine breaks down when that happens. We quit buying cars, refineries have to start and stop (very bad), storage gets full and they actually have to dump fuel ie lower the price to move it. Now that the housing boom has popped, we are no longer buying cars every three years and our cost per mile has risen. The average age of cars on the road is now 11 years and they are not efficient enough to deliver that cost per mile we will accept. We are beginning to drive less and that scares the crap out of the big boys. Our lack of consumption hurts the system as much as the lack of credit hurts the financial sector. Everything must keep moving and growing or it drowns like a shark that stops swimming.
Now all of a sudden it is OK to frack when it wasn't for many years. (I'm not passing judgement on the safety of fracking. I just don't know) I think of allowing fracking like Fed intervention for the energy sector. It might hurt or it might help. It probably won't fix anything but we will feel like we are doing something. Now if only the oil companies would actually sell the fuel cheaper to us it would make sense. Not going to happen. Plentiful fuel at $4.00/gallon will not help. We are still going to drive less until our cost per mile drops.
Nice to see some new jobs though. Any industry returning to America is a good thing.
Then some one else here was grousing about speculators. Give me a break. 1. the vast majority of futures contracts are about hedging. Suppliers and buyer locking in prices for themselves for future buys and sales. This is about stablity. No harm no fowl. 2. Sure, smoe contracts are speculative. But the impacts of these contracts work both ways. They MUST. Markets can buy contracts in one direction for a while driving prices up or down. But all of these contracts MUST be covered at some point and at that point the impact on prices the EXACT opposite of the impact at the date the contract was openned! This is a fact. People just wish to be angry and just don't know what they are talking about!
Do your homework, get educated!
Some one here was grousing about the fact that the U.S. is producing more oil today than anytime in the last X years and yet the price at the pump is high. Rightly, the poster mentioned the weakening dollar (Fed Policy) as a cause.
But the bigger point in my opinion is that energy independence or increased U.S. production has never been about prices. Oil is a world commodity and the price will reflect world production, demand, and the price will float on that as well as teh value of the dollar. So we need to get over it. However, the focus needs to be on several things. One and not necessarily first in importance is security. As a nation we have a lot more flexibility if we don't ahve to worry about the Middle East. But the BIG STUFF is as follows. Why do we want to send something like 700 billion dollars of U.S. wealth overseas each to buy the stuff? Why not buy the stuff for U.S. companies? Every here of "BUY AMERICAN"? Oh, right ... that does not apply to evil oil companies. Sure it does. Why not enrich shareholders of American companies, why not enrich every American with a pension or a 401K? Bottom line is wealth creation, and oil production is wealth creation, is HOW PROSPERITY is built. Then there are the jobs. Why do we want to creat hundreds of thousands of jobs in the Middle East oil fields? Why not creat jobs here? The unemployment rate in the Dakotas is 3%!!!!
Sorry to say, forget the price at the pump, there are a lot of good reasons to creat wealth, prosperity and jobs at home! And a bit more world supply can't hurt prices either.
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