5 Wellheads of Profit in Domestic Energy

01/31/2012 9:15 am EST


Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

The Great Domestic Energy scramble is underway and it’s time to pick the companies that have the best chance of hitting it big here at home, says Peter Staas of The Energy Strategist.

“Drill, baby, drill!” was the mantra of the Republican faithful during the 2008 presidential election. At the time, the debate centered on whether the US should expand the scope of exploration and development in prospective oil and gas fields offshore the Lower 48.

Supporters argued that an uptick in drilling activity would stimulate the economy, pad the government’s coffers from lease sales, and reduce the nation’s reliance on foreign oil. Critics countered that such a move would entail undue environmental risk and deepen the nation’s dependence on fossil fuels.

The Macondo oil spill in the deepwater Gulf of Mexico prompted the Obama administration to institute an extended moratorium on offshore drilling. Many operators lost more than a year on their existing leases, and US offshore oil production plummeted to 116,000 barrels per day in 2010, from about 312,000 barrels of oil per day in 2007.

Meanwhile, the volume of natural gas extracted offshore the US tumbled to about 2.8 billion cubic feet from 3.4 billion cubic feet in 2007.

Expect this weakness in offshore oil and gas output to persist. Although permitting and drilling activity in the deepwater continues to recover slowly, about 300 shallow-water permits expired last year and acreage acquired during the US Interior Dept’s December 2011 lease sale won’t enter production for several years.

Nevertheless, the energy sector has been an important driver of the US economy, largely because of the rapid development of oil and gas reserves trapped in shale and other “tight” reservoir rocks.

Rising production from prolific plays such as the Bakken Shale in North Dakota, the Eagle Ford Shale in south Texas, and the Marcellus Shale in Appalachia has more than offset declines in offshore output. In 2009 and 2010, annual US oil production increased for the first time since the 1980s, and surging output enabled the US to overtake Russia as the world’s leading gas producer in 2010.

Exploration and production companies such as EOG Resources (EOG), an early mover in some of the nation’s most compelling shale oil and gas fields, have reaped the rewards of rising production and elevated oil prices. Frenzied drilling activity in these plays has also been a boon for services companies such as Halliburton (HAL).

More important, many of these fields are located in regions that haven’t traditionally produced energy or that lack sufficient takeaway capacity to handle rising volumes of oil, natural gas, and natural gas liquids.

Demand for new and expanded midstream infrastructure will be met by master limited partnerships such as Income Portfolio holdings Enterprise Products Partners LP (EPD) and Spectra Energy Partners LP (SEP), enabling these pass-through entities to grow their cash flow and quarterly distributions.

The rapidly changing domestic energy picture also benefits other economic sectors. For one, the shale oil and gas revolution has resulted in an oversupply of natural gas that in recent years has kept the price of this commodity hovering near record lows. Depressed prices for natural gas add up to lower utility bills for many US consumers at a time when households are focused on making every penny count.

Meanwhile, a newfound abundance of ethane has revivified the domestic petrochemical industry, giving chemical manufacturers a dramatic cost advantage over producers in Asia and the Middle East that rely on naphtha and other oil derivatives for feedstock.

Local economies also benefit from the feverish activity in emerging shale oil and gas plays. For example, North Dakota’s economy has boomed in recent years thanks to the Bakken Shale, while labor shortages in the Permian Basin, Eagle Ford Shale, and Marcellus Shale should provide plenty of employment opportunities in these regions.

Local financial institutions also reap the benefit of increased economic activity. Texas Capital Bancshares (TCBI), for example, has been one of the few US banks to post organic loan growth in recent years.

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