In Case You Missed It: The Year in Shale

The enormous increase in 2013 in unconventional oil and natural gas production from North American and especially US shale formations drove most of the conversation about energy stocks throughout the year. As it turns out, the United States is sitting on plenty of shale formations, some that are currently under development, and some that drillers are still trying to figure out how to get into.

A Boon for Small & Independent Drillers

For all the talk about how increased production of crude and especially natural gas will soon make the US an energy independent nation, and cause huge disruptions to global energy markets, some of the most immediate effects of the so-called shale boom are already obvious and much closer to home. For instance, in general, the major integrated oil and gas companies, the “super-majors”, have not so far been able to benefit from this relatively recent and sudden turn of events nearly as much as the smaller independent companies have. Equities.com’s coverage of the ramp up in shale-extraction has touched on this aspect of the subject time and again:

• In early April, small driller Royale Energy (ROYL) watched shares pop nearly 10 percent after reports of the possibility that enormous shale deposits in the region have yet to be tapped.
• On Sept. 24, analysts from Goldman Sachs (GS) returned from a trip to the Bakken Shale, and were so impressed by what independents were doing there that they initiated coverage on both Continental Resources (CLR) and Oasis Petroleum (OAS) , sending both stocks significantly higheralong with many other independents.
• On Oct. 10, Antero Resources (AR) held its IPO with rather spectacular results. Between the Utica, Marcellus, and Upper Devononian Shale formations, the company is sitting on some of the most plentiful known reserves in the country, so the company’s debut comes as no surprise.
• Range Resources Corporation (RRC) is another independent driller that has built its success on its presence in American shale. The stock added over 30 percent in 2013, to its current trading price of almost $82 per share.
• A 2013 year-end recap of the independent oil & gas industry’s best performers, all of which are heavily involved in shale extraction.

Don’t Underestimate the Majors Just Yet

A good portion of the shale narrative has focused on the success of smaller oil and gas firms, and with good reason. Indeed, big oil spent the early part of the new millenium still trying to book those ever-so-crucial “replacement reserves”, and found themselves faced with a resurgence of resource nationalism (in places like Russia, Chad, Papua New Guinea, and Nigeria) that complicated their ability to guarantee investors continuity in production levels, while smaller companies snatched up some of the best shale acreage to be found in the US.

All the same, the majors cannot be counted out, and for a number of reasons:

Quicksilver Resources (KWK) was a struggling company, badly in need of a turnaround. In 2013, the company delivered that turnaround, largely the result of a third-quarter earnings report that promised production increases from its properties in the Barnett Shale and Sand Wash Basin. This would not have been possible, however, without the help of majors Royal Dutch Shell ($RDS.A) and Italy’s Eni SPA (ENI) .

Furthermore, major oil & gas companies have a number of advantages over their pluckier, smaller colleagues. Most importantly, they have more cash to play with, and more experience. Perhaps even more important, however, is the fact that despite the uptick in resource nationalism that has led to the creation of astonishingly huge state-owned companies in countries like emerging market countries like China and Brazil, these companies are still badly in need of both investment and expertise, and the super-majors are the companies they seem most likely to trust at present:

• The likelihood of the “shale boom” expanding to other regions of the world is actually more or of a certainty than a mere possibility. Despite some very prohibitive geological conditions, countries like China, Argentina, Russia, and Brazil have as large or at least comparable reservesto those atop which sit the United States.
• In August, Chinese state-run oil giant Sinopec (SNP) signed a deal with Weatherford International (WFT) , a Swiss services company. Halliburton (HAL) and Schlumberger (SLB) already have presence in the world’s most populous country, and this is likely to only further smooth a path for major oil’s participation in the region’s shale drilling.
• In October, Spain’s oil giant Repsol SA ($REPYY) singled out North Africaas the next promising region in the scramble to grab up shale reserves wherever they may exist.
• Meanwhile, last June Chevron (CVX) and Argentina indicated that they were back on for drilling in the much sought after Vaca Muerta Shale formation.
• Finally, in mid-December, ExxonMobil (XOM) saw shares pop on an upgrade from Goldman Sachs. A great part of this had to do with the recent opening up of the long nationalized Mexican oil sectorto foreign investment. The ailing Mexican oil & gas industry is in bad need of investment, that is if it plans to tap the country’s plentiful shale reserves.