3 energy companies poised to pump up profits

As regulations tighten around coal, these natural gas and oil producers stand to benefit.

By Traders Reserve Apr 22, 2014 11:56AM

Image: Natural gas plant © Kevin Burke/CorbisBy Karen Riccio

 

The Environmental Protection Agency just announced plans to further stiffen regulations on coal-fired power plants and the emission of carbons.

 

This can only mean bad news for companies with profits tied to coal, and good news for profits tied to natural gas and oil. The EPA's move will ultimately increase the need for cleaner, more efficient producers of energy.


While solar and wind may have a purpose and contribution to the cause, the immediate beneficiary will be the explorers and developers of natural gas and oil. Natural gas reserves in the U.S. have increased two-fold over the past 14 years; and shale and tight gas production has more than doubled in the last four years. According to the International Energy Association (IEA), we are sitting on a 2.2 quadrillion cubic feet of proven and recoverable oil.

 

Combine the reduction in coal power and shift away from imported oil and you have the perfect recipe for companies drilling in the most lucrative acres on U.S. soil: The natural gas-producing Marcellus is located in Pennsylvania, New York, Ohio, and West Virginia; it contains proved reserves of 32 trillion cubic feet. The Eagle Ford, Permian and Bakken make up the lion's share of crude oil production.

 

Here are three companies with a huge presence in these areas that stand to benefit . . . as will their shareholders:

 

Cabot Oil & Gas (COG)

Cabot is a $14.5 billion market-cap company with exposure to the Marcellus Shale as well as the Marmaton-Penn Lime shale in Oklahoma. It also has recently gained some exposure to the Eagle Ford/Pearsall shale.


The company's production growth has averaged 45 percent annually since 2010, mainly though expansion of its natural gas portfolio. It has also steadily increased proven reserves, averaging 23 percent growth annually over the last four years.

 

Cabot has more than 3,000 drilling locations -- and counting -- positioned in a location in the  Marcellus Shale expected to provide 25 more years of drilling. These super-rich locations enable Cabot to be a low-cost producer, largely because the company recognized the potential early and got in before many competitors.

 

As it has done in the Marcellus, COG has been able to reduce costs per well in the Eagle Ford while decreasing days to completion and increasing flow rates. Over the next couple of years Eagle Ford operations should come closer to making up 10 percent of COG's total production.


These wells did wonders for Cabot in 2013. Total production was 55 percent higher than 2012, cash flow was 57 percent higher, and net income rose 112 percent -- all without the benefit of acquisitions. A 42 percent increase in proved natural gas reserves topped off the year. Cabot expects production to increase 25 percent to 40 percent in 2014.

 

Pioneer Natural Resources (PXD)

Pioneer Natural Resources has a $29 billion market cap and is sitting on $402 million in cash and a whole lot of pumping and well-servicing equipment making it the 14th largest of its kind in the U.S.

 

Owning its equipment gives Pioneer an efficiency edge in the Permian shale as well as the Eagle Ford shale play. Pioneer has had an operating history in Texas back to the early 1980s. Today, it is the second largest oil producer in the Lone Star State.

 

Over the last two years, Pioneer has decreased its drilling cost per foot by $2, and the number of days between starting to drill a well and putting it into production by 60 percent. The net result is more wells, drilled in less time and at a higher profit margin.

 

The company is the largest holder of acreage in Spraberry & Wolfcamp with about 825,000 total acres, making up 50 percent of the company’s total production and just over half of its proved reserves. Pioneer also has a 46 percent interest in 230,000 gross acres in Eagle Ford.

 

Pioneer set a record for its fourth-quarter 2013 production in Eagle Ford Shale, averaging 40,000 barrels of oil per day. That's up 14 percent from 35,000 in the fourth-quarter of 2012.

 

For 2014, Pioneer plans to spend $3.3 billion in total. Of this, $2.2 million has been allocated for the northern Spraberry/Wolfcamp area; $205 million has been set aside for the southern Wolfcamp joint venture area, $545 million for Eagle Ford shale and $100 million for other assets.

 

Pioneer expects to grow revenues by 15 percent to 20 percent annually over the next three years as its operations become even more efficient.

 

PDC Energy (PDCEj)

PDC Energy has a 40-year history of oil and natural gas exploration and production and has exposure to the Utica Shale in Ohio, the Wattenberg Field in Colorado, and the Marcellus Shale gas play in West Virginia.

 

PDC Energy has around 270,000 net acres spread among the three areas and production is growing quickly in each. Wattenberg grew about 23 percent in 2013 and 34 percent in the Marcellus. Utica production just came on line this year and is ramping up quickly. It made up around 5.4 percent of 2013 total production, but that's just with initial production from new wells.

 

Production from all wells last year grew 35 percent or 7.4 million barrels oil a day as well and over 200 projects are targeted for horizontal drilling in 2014.


The stock trades at around $60 today and has 15 percent to 20 percent upside before the end of the year if it meets drilling expectations.

 

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