Small Producers Soar In The Shale

12/2/2013


Shale drilling has proved a boon for both the U.S., which is motivated to lessen its reliance on other countries for energy, and energy producers, which are armed with new technologies that let them tap deposits once thought inaccessible.

Last year, U.S. production of crude oil rose 15% to 6.5 million barrels per day, its highest since 1995 though still 33% short of the 1970 peak. The U.S. Energy Information Administration (EIA) projects the U.S. will supplant Saudi Arabia as the biggest oil producer this year.

Marcellus is responsible for most of the growth in natural gas. Permian remains the largest oil producer, though Bakken and Eagle Ford have driven recent growth. Bakken accounts for about 10% of U.S. oil production, according to the EIA. Railcars transport roughly 67% of oil coming out of Bakken and 11% of all U.S. crude, boosting demand for Upside Best Buy Trinity Industries ($51; TRN), a maker of those cars.

Hydraulic fracturing — using bursts of water, sand, and chemicals to unlock oil and gas trapped in dense shale rock — has been banned in parts of Ohio, Colorado, New York, New Mexico, and Pennsylvania. Popular opinion represents a serious threat to the industry's growth — unless energy companies find ways to ease concerns that fracking can disrupt neighborhoods, contaminate water, and possibly even trigger earthquakes.

Efficiency gains have reduced the number of rigs required to maintain production levels. But demand remains solid for Helmerich & Payne ($77; HP), a maker of the horizontal drilling rigs used to penetrate shale formations.

Shale drilling has barely moved the needle for integrated giants Exxon Mobil ($95; XOM) and Chevron ($124; CVX), which struggle to expand their massive production bases. However, the four smaller producers listed in the table below grew production by at least 9% year-over-year in the first nine months of 2013. In most cases, their production skews heavily toward oil. Oil prices have slumped more than 10% from recent highs, partly because of an agreement to ease sanctions on Iran. Still, oil remains far more profitable for producers than natural gas.

Shale drilling seems better suited for smaller companies. Scale does not matter as much in this arena, given that land-drilling sites are far cheaper to operate than those offshore. Smaller, nimbler firms also enjoy the flexibility to rush into promising sites and tinker with well designs.

Continental Resources ($110; CLR) has reported quarter-over-quarter production gains in 13 straight quarters and expects 2014 production to rise 26% to 32%, with oil accounting for about 70%. Continental claims to be the biggest leaseholder, driller, and producer in the Bakken.

Meanwhile, Whiting Petroleum ($60; WLL) is ramping production in the Niobrara formation, where it plans to open a gas-processing plant early next year. Whiting continues to migrate toward oil and natural-gas liquids, which combined to make up more than 85% of production this year, compared to 76% in 2009.

RECOMMENDED ENERGY STOCKS
Below we list four independent energy producers recommended for purchase. Those presented in bold are Dow Theory Forecasts stocks, the other two are Upside Best Buys.
----------- Production, Last Nine Months -----------
Company (Price; Ticker)
Stock-
Market
Value
($Bil.)
Total
Volume
(MBOE) *
Year-
Over-
Year
Growth
(%)
Oil
(%)
Nat'l Gas
Liquids
(NGL)
(%)
Natural
Gas
(%)
Growth Driver
Primary Drilling Sites
Carrizo Oil & Gas
($41; CRZO)
1.6
7.7
9
29
3
68
NGL up 114%, oil up 49%
Eagle Ford, Barnett, Marcellus
Continental Res.
($110; CLR)
25.8
36.3
40
71
0
29
Oil up 43%
Bakken 
Oasis Petroleum
($47; OAS)
4.5
8.5
49
90
0
10
Natural gas up 78%
Williston Basin 
Whiting Petroleum
($60; WLL)
7.3
25.1
12
79
8
13
Oil up 16%
Niobrara, Permian Basin
* Millions of barrels of oil equivalent.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com