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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Not reading all the posts here but had to put in my two cents.
It's actually a good thing to hold onto those big pools while all the other sources are used first. Even if the transportation system is shifted into electrical power over the next 20 years (see Buffett speech at Rice U. in 2009) there will always be demands for oil in many other sectors which demand the black gold. He who sits on the big "8 more pools" (Alaskan deposits) will have the power wand in the future. The tree huggin' EPA is actually doing the U.S. a favor. Those fields will be opened up when the rest of the tree is picked clean. All low hanging fruit (conventional oil) on the tree is nearing depletion. Now we go for the harder to reach fruit through increased deep sea /Artic drilling along with the wide use of fracking. It won't take long to pick the tree clean as Chinese are increasing usage even though they are trying to steer mass transit towards electric trains. Smart on their part when it comes to long term planning.
BTW, speaking of fracking, Jubak needs to do some more homework. I know of fracking out my back dooroccurring in the 50's - fracking wasn't pioneered in the 70's - and I will also note he should go a step further and note Cheniere Energy (LNG) will NOT be the first plant to have a liquefied export facility in the U.S. They will most likely be the first in the lower 48. Alaska has a facility, reopened by ConocoPhillips this year for exports to be delivered to Japan. Marathon sold their stake in the facility to COP. Take note the plant is having supply issues from a mature Cook Inlet field. Maybe they will go back and frack the field if it hasn't been done already?
Will the American people benefit or will the good jobs and profits go to foreigners while the stock dividends go to large corporate investors? Our leadership enabled and promoted for Arabs, Indians, and many others from 3rd world countries to be entrepreneurs and executives here in our country running gas stations, motels, restaurants, and liquor store while our people are grossly underemployed and only sold debt instead of opportunity. Many large companies such as International Paper are owned by Japanese and well the world has their hand in our ot while we are ever so disempowered to prosper in our own country. No other country in the world allows foreigners so much power siphoning the money and jobs for export to their home countries. It is obvious they do not enjoy, do not intend to be Americans, and are here for one thing only: to take us for a run and leave us high and dry.
Do not let American sounding company names fool you into believing it means new money and jobs or is actually owned by real Americans who believe in empowing us to work, run our country, and prosper. There is no real stimulus program planned by our leadership to take care of their own people as they are global citizens who bank abroad with a plan to jet away when the carefully balanced cards collapse. The stimulus was the wars as worked many times in the past, but miserably failed this time around in the 2000's leading to huge losses and sacrifices by Americans more than we can really ever know. It's well known the Swiss currency is exempt from taxes and devaluation though if America runs dry and can't pay it's debt notes, Europe, Asia, and South America will also fall. This is resembling the old European model on a larger scale well before WW1 and 2 happened and becoming more like Asia and the Middle East due to opening us up with no economic protectsions that most other countries exercise. We should be asking questions and finding out what the oil situation actually is and show interest in alternative economical transportation such as tiny cars for local commutes and redesigned engines that get many more miles to the gallon as well as allowing us an adequate supply of small motorcycles and parts to get us to our new jobs.
I'm not quite buying this. We have known about the oil deposits in the Dakotas since the 1950's, we've only just now become desperate enough to tap them. I'm not downplaying the amount of oil being produced but it still pales in comparison to the size of past finds. In addition our new technology while allowing us to extract more oil also allows us to extract this oil faster giving us a false sense of abundance.
None of this suggests the new finds will alter the long term trend as we are only extracting oil faster from smaller sources while we are still not finding anything that comes close to what we tapped first. The new sources are going to be depleted far faster than in the past and while I do believe we will continue to see technology improve the percentage of oil we can recover, none of this suggests that oil is going to be significantly cheaper in the future. There will always be oil but we may run out of $10 or even $75 a barrel oil.
Repeal the congressional ACT OF 1871.
Start a labor political party, we are a democracy by constitution.
The republican party is not a party of the people.
Bring common labor enployment back.
A young man between 10-13 from Beaverton, Oregon invented a solar collector that transfers more sunlight into electricity than any other. INCREDIBLE invention but... the patent has been bought and the technology has not surfaced again. Where is it? Who has it?
Would YOU, America, be willing to support a Death Penalty for entities that purposely suppress us? Remember that GM bought the patent for the water powered engine so that gasoline was the only option. There is ZERO VALUE in oil because we cannot sustain using it. Natural is the only way BUT, who has that patent? I wonder.
This article is joke. Where is the oil that is going to make us #1. The only oil the US has left is the $250.00 per barrel hard to get and process oil. If oil is now at $90.00 per barrel are you for $9.00 per gallon gas.
And what other countries will buy or can afford at that price. We can't afford it.
All the inexpesive oil is gone.
This article is a opium pipe dream.
Hey Mickey82, I hope you like the taste of petroleum in your morning coffey, because if you don't back your government against the exploiters that's exactly what you'll get. Once the water supply is tainted by fracking it's all over. For the American consumer, this drilling frenzy produces no real benefit. The resulting product is sold on the international market and will not therefore not produce lower prices or energy independence for the United States. Stop drinking the corporate koolAide. How many people have to get screwed by the greed of corporations before you, and the thoughtless people like you wake up?
Hey Mr. Libertarian. I have no respect for any politician or candidate for office who would run on the brainless premise of libertarianism. If I want my government dismantled I can seek to dismantle it myself. I don't need the help of some well heeled cynic who's only real agenda is to disable the system of economic justice that has taken so long to develop and is still an inadequate and fragile thing. Without a powerful, progressive government firmly in control, common people suffer. They suffer at the hands of the rich and powerful, the kind of people who have lobbied their own interests to the point where the money pools they call corporations are now considered "people" for the purposes of effecting government. I don't care how you rant and rave about freedom and the sovereign rights of "people" I know you really feel that the society should serve the economy. I'm here to say that I do no buy your greedy concept. The economy and the money generated by that economy exists to serve the society. Wealth today is distributed according to economic power. That is to say that the rich get richer and the poor find it harder and harder to even hope for a way up the ladder. This must change if the country is going to continue to be a place of freedom and hope. To all voters, I would say; if you want your society and therefore your country to make progress, vote for progressive candidates. If you don't believe this, then don't take my word. Please read your history. Abraham Lincoln doing what was necessary to end the blight of slavery and to reunite the nation after a bloody civil war. Teddy Roosevelt breaking the power of the giant trusts and leading the way in conservation of resources and preservation the land against financial exploitation. Franklin Roosevelt virtually rescuing our democracy from the callous policies of the ruling elite while defeating evil in the world. All of this history would never been been written where those leaders not the progressives that they where. I for one see history repeating itself in the current era of social challenge. America did the right thing in rejecting the anti-government view presented by conservatism and it's younger cousin Libertarianism and reelected the progressive. You go America!!!!
If anyone thinks the current admin will passively stand by and let the oil and gas companies produce domestically at a pace that keeps energy prices low, they only need to watch the EPA stealthily, or not so stealthily since the electon, enact regulations to thwart fracking. The desire for $8 gal gasoline/diesel has not waned. It has been reeffirmed recently by the administration as a way to make the failed green alternatives/renewables commercially competiive. Fortunate for us, the ingenuity of the oil companies exceeds the green agenda driven EPA. Even if fracking were the environmental threat presented in a film mentioned below, it isnt and there is another more fact and scientifically based documentary that debunks the hysteria depitced in the water on fire documentary. A new proven fracing compsite, void of any chemicals, completely organic, is being used and safe guidelines are inplace in states like PA and OH.
Given current technology and abundance, nat gas is the ONLY energy source that can get us off imports from hostile countries any time soon-10years. If you factor the costs of military presence committed to keeping oil flowing from the Middle East, the actual costs per barrell is north of $150.
At $4/gal, adjusted for inflation, we pay no more for gas than in the 1930s-truly a miracle. Also, i dont think many people realize that oil is worth 3 times as much when refined into petroleum by products as opposed to transportation fuels. Paint, rubber, glass, drugs, lubricants, cosmetics, plastics, fabrics etc.. Oil companies know this so you an throw out all the conspiracy theories about oil companies conspiring to keep prices high.
Also, low nat gas prices have caused utility companies to switch from coal to gas, an environmental plus.Unfortunately all most people know about the energy issue is from the gas pump and a biased administration and media that messages that supporters want dirty air and water and that oil and gas receive extra tax breaks. Environmentally speaking, an internal combustion engine emits far less environmentally damaging emissions than generated by mining lithium for batteries,nitrous oxide from ethanol, and produces 25-30% more output BTU than either of these sources at 1/10 the costs if you emove the subsidies.
While it is politically popular to make EXXON and other oil companies into greedy environmentally insensitive entties, they have done more to develop the techologies leading us to energy abundance and cleaner burning fuels than ALL government programs combined. And as far as taxes, Exxon paid $45 billion in 2011, GE 0.
I am not optimistic that the general pubic will do the homework necessary to form intelligent opinions
about the whole enrgy picture and how inexpensive energy fuels a vibrant economy. Anyone caring to research, check out how Spain went bankrupt trying to create a green energy economy and now has unemployment rates exceeding 25% and youth unemployment approaching 50%.Only a pragmatic scienifically driven approach to our energy future will yield affordable progress and create the jobs and infrastructure needed for future generations. Political solutions do not exist except in the minds of politicians,most of whom have never seen a drilling rig and dont pump their own gas.
Drill, drill, and drill some more.
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