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, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
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 US 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 timelines that had been discounted on the risk that the boom would be over before they were completed.
- Fourth, the sectors in the US economy that will reap benefits from lower US energy prices, beyond the general advantages flowing to the US 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 US 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 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, and moved the state into second place among US 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 October 21, 2011, in this post on Big Oil snapping up smaller players—if you want to buy producers to take advantage of the US oil boom, it's better to buy the small companies that staked out big acreage early.
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 January 13, but it's down 9.2% from its September 14 high on worries about the global and US economies. Concho Resources is down 12.3% since I sold it on May 21 at $90.26 for the same reasons.