Don’t worry, we haven’t just been sitting around here at Gumshoe HQ, waiting for the Fifth Coming … in fact, although I may have an itchy “buy” finger to upgrade my own iPhone when this new one becomes available next week, I’ve spent the day looking into something completely different.
Porter Stansberry has been blanketing the e-waves with his pitch about the renaissance in US energy production — a presentation video that lays out his case for why US oil production will surpass Saudi Arabia’s and lead to an end to imports (surpassing the Saudis isn’t quite as dramatic as many folks think — the US has long been the second or third largest oil producer in the world along with the Saudis and Russians, it’s just that we’re the only one of the huge producers that consumers far more than we produce), and how dramatically the shale oil and gas resources that have been unlocked by horizontal drilling and hydraulic fracturing will change the economic picture for the United States. It’s an interesting pitch, though his long screeds tend to go several steps beyond the “we think this is the trend” — so his previous “end of America” pitches implied that the death of the dollar as a reserve currency would lead to an almost uninhabitable country, and this one makes us think that the return of cheap and abundant oil will make Rockefeller and Hunt-like billionaires and lead to another wave of unprecedented prosperity.
Which isn’t to say that the trend or the idea might not be interesting or worth considering for your investment strategizing … but you don’t necessarily have to follow the idea all the way down the rabbit hole, there is a lot of unpredictable future out there that might not follow the logic you see laid out before you. There are, after all, lots of really smart people in every era, and few if any of them have ever been able to consistently predict the real wholesale changes that occur over time.
The basic premise of Porter’s presentation is that “America’s New Oil Boom” is going to make investors rich by cutting prices — with a fairly long explanation of the sometimes counterintuitive premise that lowering prices is what makes billionaires (it’s not the only way that fortunes are made, of course, but the idea that constant innovation and price cutting that drives much higher adoption or consumption, even as it reduces margins, is a profitable way for businesses to grow dramatically is a real and tested one, for everyone from the early oil barons to today’s tech kingpins).
He goes on to highlight a few of the ways to invest profitably based on this idea:
- Focus on owning assets versus owning stocks in most cases (that’s just an argument for bonds over stocks when you’re talking about speculating on beaten down natural gas producers — you know that gas will again become more valuable, but that value will likely be tested through bankruptcy or asset sales with the crushing that the stocks have taken). One example he gives is ATP Oil & Gas, which was in rapid decline until it filed for bankruptcy a few weeks ago (after Porter wrote this, it sounds like), and which has valuable assets whose value will pass through bankruptcy to the bondholders, presumably, in one form or another.
- Buy companies that will profit from the infrastructure buildout for natural gas export.
- Buy companies that will profit from lower cost natural gas, particularly those who profit by generating electricity from gas and thereby getting higher margins than coal burners.
Those are all broad themes I’ve looked at from time to time over the last couple years — sometimes in response to teaser ads from Stansberry and others, such as the many pitches for Westport Innovations (WPRT) or the various LNG tanker companies (like this one, for example), sometimes just in exploring ideas for the Irregulars as in this older article, and I’ll get into sniffing out some of the specific ideas in future notes if folks are interested … the basic pitch that oil and gas are cheaper in the US than elsewhere, and that profits will be made on that differential, is a logical one and worth continued exploration.
But later on in his pitch he talks about the “Secret Shale” as a way to profit from getting in early on continually emerging new shale oil exploration territories, and I do feel twitchy whenever anyone calls something a “secret,” so I figured I’d sniff that one out for you first.
Here’s how Stansberry introduces that idea:
“Based on the experts we’ve interviewed and the research we’ve done ourselves, we believe there are more than 20 billion barrels of recoverable oil in at least five major shales in the U.S.: the Bakken in North Dakota, the Eagle Ford in Texas, the Marcellus in Pennsylvania, the Monterey Shale in California and… perhaps the richest of all… a new Texas shale that’s just been announced by one of the largest oil and gas firms in the U.S. We learned the details about this new shale from one of our most trusted sources.
“We’ll tell you all about it in this presentation… but for now, just think about what this means:
“Each of these five new shale oil fields – every single one, by itself – would be the largest oil field ever discovered in America.
“Over the next several years drilling and production will prove out these new shale fields. As that happens, America’s proven reserves of oil will soar, from only 15 billion barrels to more than 100 billion barrels, making America the world’s leading producer.”
So that’s what caught my eye — after the early days of the Bakken oil rush, everyone wants to be “in early” on a new shale area when the land gets acquired somewhat more cheaply, before the reserves are well known. So what is this “new shale”?
Well, Porter doesn’t come right out and say what it is, of course — for that he wants you to subscribe to his letter and get the “special report” — but he does hint away enough that we can sniff it out for you. Here’s more of the enticement:
“What very few people in the investment world know right now is that there’s about to be a major new shale play that’s only now being staked out by the major independent oil companies in the U.S.
“Based on information I have from Cactus and other industry insiders, it appears this new field could become the largest oilfield in the U.S. over the next 20 years with 35 billion barrels of recoverable oil.
“I base this statement off test wells that have been drilled, the thickness of the shale (according to the aerial extent of the shale), the total organic carbon of the shale’s core samples, and the proximity of an existing major oilfield.
“A few of Cactus’s contacts in the oil business are currently buying leases and royalties on this play, which is only now starting to be disclosed by oil and gas firms.
“In other words, this story is still in its infancy–and I believe it will be absolutely huge.”
And a few more clues:
“There are currently two independent companies with large acreage in the field today. I strongly recommend you buy at least a small stake in one of these companies today. It already has operations in all or most of the major U.S. shale regions–and has proven to be the best independent company at getting large–acreage positions in emerging shale plays. Best of all, this company has figured out a way to get the Japanese to pay for all of their drilling.
“How much you will make from this opportunity is impossible to say. But I believe you could easily double or triple your money over the next few years -especially because of the advantage they have over the Japanese.”
And that’s it, those are our clues. So who is Porter pitching here?
Well, the Mighty, Mighty Thinkolator says he’s touting Devon Energy (DVN).
Why? Because I’m quite sure that for that “secret shale” area he’s talking about is what’s usually referred to as the Cline Shale, part of the Permian Basin under Texas — it’s been the focus of chatter of some shale folks over the last 6-9 months, and it’s widely expected to be huge (it’s very thick and heavy in organic content, apparently), but it’s certainly not headline news yet. At least outside of Texas. And the biggest position in this acreage, as far as I can tell, is owned by Devon Energy.
Which is a decently valued oil and gas producers anyway — probably because a lot of their production is gas throughout Canada and the U.S. They are very low-debt compared to many of the independent oil and gas companies, particularly because they own an unusually large number of midstream assets for an “independent” company (ie, they aren’t just a producer, they also provide some midstream services both for their own production and for other customers, and they have several thousand miles of pipelines). If you consider the fact that they have those pipelines and midstream assets to help buttress their balance sheet (they could sell a lot of that to a MLP if they wanted, and MLPs are flush and eager these days), then it probably comes close to offsetting the $3 billion in net debt ($10 billion debt/$7 billion cash, roughly).
And investors are not worried about Devon’s creditworthiness at all — they’re borrowing money for 30 years at 4.2%, and for five years at 1.4%. Almost all bond rates are pretty low right now, even for companies that are similar but in substantially worse straits than Devon like Chesapeake Energy (CHK), but those are very low yields for cyclical companies … Devon is paying not all that much more than the Feds, who are only paying about 2.8% for 30 year loans.
So that tells us they ought to be pretty solid — some diversification, some midstream assets, some cash, manageable debt.
And they’re getting a lot of funding for their initial exploration of the Cline Shale from their Japanese partners — Devon has been doing partnerships with foreign oil companies for a while, including a big one with Sinopec that significantly added to their exploration portfolio a while back, but this one is with Sumitomo, a Japanese firm that, as I read it, is covering almost 80% of the drilling costs for the next couple years in exchange for about 30% of the equity in this shale field. Not bad.
Devon has also, like other natural gas-focused companies, been almost desperately trying to get more “liquid” — spending more of their budget on increasing production of oil and natural gas liquids (NGLs) and less on boosting natural gas production — which makes perfect sense given the disparities in pricing, but Devon is still very much a large Canadian-American natural gas company that also happens to produce a growing amount of oil.
Devon is not the only one in the Cline Shale, to be sure — the big shale players are looking there as well, and some of them already have positions. Chespeake (CHK) and Apache (APA) are also both active in the area, with Chesapeake probably having the second biggest acreage (I haven’t triple-checked that) and Apache having a 10-well drilling program for 2012 into the Cline shale area (all three are huge in the region, with thousands of wells in the Permian Basin, a longtime production area using traditional vertical drilling). Range Resources (RRC), best known for its Marcellus acreage, also has an eye on the Cline Shale, as does the less-well-known Concho Resources (CXO) that’s focused on the Permian, and there are a handful of smaller producers and junior explorers who have acreage already in the area, including Laredo (LPI), Lynden Energy (LVL in Canada, LVLEF on the pink sheets), Callon Petroleum (CPE) and probably some others that I haven’t heard mentioned yet … and probably at least a few will get teased as the chatter about this shale area heats up.
I hadn’t heard of the Cline before April, so it’s getting attention fairly quickly — and there are certainly some folks who think it will turn out to be a genuinely major oil producing area, though there’s also a lot of confusion about the nomenclature. Most of the stuff in the Permian Basin is a little confusing, since it’s been explored for so long and given so many different names over the years, but most of the time these particular shale areas are referred to as either the Wolfcamp shale or the Cline shale, with the possibility as they explore more that those might be two areas that merge somewhere, and the Cline is of “Pennsylvanian” age (that’s the one between Permian and Missisippian, apparently).
So what do you think? Getting in early on new shale oil exploration areas has been a pretty profitable move when it comes to junior explorers who are either lucky, smart, or well-timed in their drilling and fundraising, but I think we’re probably dealing with a different dynamic in the Permian Basin, since it’s by no means a “new” oil area and the big oil explorers and shale producers are already active and on the ground with good acreage … it seems unlikely that we’ll see a junior grow into a major producer based just on this Cline Shale, impressive though it may be, but the early indications are that there’s going to be a lot of oil produced (and probably quite a few teasers produced, too, fingers crossed!)
I know that Keith Schaefer over at Oil and Gas Investments Bulletin has been touting the potential of Lynden in this area, and they do look like one of those potential “surprise value” stocks since they don’t get much credit for their exposure to the Cline, but that’s a tiny one and will undoubtedly be bouncy with a heavy reliance on each press release and drill result — it’s hard to argue against Devon as a big fella in this area with more limited downside, though, particularly if you think that the Cline shale will be a great production area and that natural gas will gradually recover in price over the next several years. That said, I had never looked at all closely at the Cline before this morning, so I eagerly await the more learned comments of the great multitudes out there in Gumshoe-land … if you’ve got a Cline or Wolfcamp opinion, or a favorite shale pick, feel free to shout it out with a comment below.
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