Gas from Shale Is Energy's Holy Grail

12/23/2009 12:01 am EST

Focus: STOCKS

Richard Young

Editor, Young's Intelligence Report

Richard C. Young, editor of Intelligence Report, says North America has an abundance of shale, a great source of natural gas, and current prices look attractive.

Shale gas offers enormous opportunity to increase global energy supply and security. Exxon Mobil (NYSE: XOM) estimates that there are one quadrillion (with fifteen zeros—Editor) cubic feet of shale gas worldwide, equal to a decade’s worth of demand. And exploratory drilling is just getting under way. In the US, shale plays have turned a shortage of domestically produced natural gas into a fully supplied market.

Shale gas production is a recent development in the gas industry. Ten years ago, producing gas from shale was not economically feasible. But new drilling techniques and hydraulic fracturing have made production possible at reasonable gas prices.

To extract shale gas [from] dense rock, companies first drill a horizontal well through the rock, then inject high-pressure liquid to fracture the rock and cause it to release the gas. The gas is then pumped to the surface.

The Horn River Basin in northeastern British Columbia is the largest shale gas field in Canada, and according to Michael Graham, an executive vice president at EnCana (NYSE: ECA), it may be the best shale play in North America. Exxon, arguably the most disciplined allocator of capital in the oil and gas industry, has leased 250,000 acres in the Horn River Basin. If Exxon is involved in an emerging gas play, you can be sure there is long-term value to be extracted.

Exxon’s initial wells in the Horn River Basin indicate that each well drilled will produce between 16 million and 18 million cubic feet of gas per day—an amount comparable to the yield from wells being drilled in the Haynesville shale.

Short term, supply may overwhelm demand, but long term, there is no better energy commodity to own than natural gas. Natural gas is historically cheap versus coal, oil, and uranium.

The sooner businesses, utilities, and residential consumers recognize that there is adequate supply of natural gas, the sooner you will see an increase in demand and higher prices. [In the long run], on an energy-equivalent basis, oil and gas should trade at parity. That means gas should trade at one-sixth the price of oil. If oil is at $76, natural gas should be at $12.60. (Currently one contract trades at less than half that price—Editor.)

With a 260,000-acre land position, my highly favored EnCana (NYSE: ECA) is a big player in the Horn River Basin. The company recently completed its long-delayed spin-off of Cenovus Energy, [dividing] the old EnCana into an oil company (Cenovus) and a natural gas company (EnCana).

Post-spin-off, EnCana is a pure-play natural gas company focused on the development of unconventional resources in North America. Unconventional resource plays include shales, tight sands, and coalbed methane. The company is targeting 9%–12% production growth over the next five years. (EnCana stock traded above $31 Tuesday—Editor.)

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