Is America Saying Adios to Foreign Oil?

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Change can be an investor's best friend. It gives the most astute investors the chance to find hidden opportunities. In the oil market such a transition is happening right now. China's oil imports are expected to surpass America's as soon as October, 2013. Every day growing U.S. producers are displacing their foreign competition.

Why Are These Changes Occurring?

A number of factors are driving down U.S. oil imports. New EPA standards will decrease fuel consumption until the 2020s. Also, slowing population growth is decreasing the projected U.S. population all the way into the 2050s. 

On the production side big changes are happening. The growth of unconventional oil sands and shale oil resources in North America is decreasing demand for imports. Even Saudi Arabia has stated it does not want to increase its own production. With many fields in the Middle East slowly declining and China's buying spree, there is simply less fuel left to bring to U.S. soil. 

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CLR Total Return Price data by YCharts

The Winners

Continental Resources (NYSE: CLR) is a poster child for new American oil. Its operations in North Dakota's Bakken region are significant with around 1.2 million net acres as of Q2, 2013. By using horizontal wells and a little bit of ingenuity, it managed to bring its oil production to 135,700 barrels of oil equivalent per day (Boepd). Thanks to the low sulfur content of Bakken crude, Continental receives a pretty penny for its wells and has a strong profit margin of 30.6%.

The Bakken is starting to mature, and pipelines are slowly being built to the region. To keep on growing Continental is heading south to the SCOOP formation in Oklahoma. The company's recently completed wells are producing 37% to 45% oil. While this is nowhere near the highs set in other formations, SCOOP's close proximity to refineries along the gulf coast should help its margins. 

With its investments in the SCOOP formation, Continental should be able to increase its production from 98 thousand barrels of oil equivalent per day (MBoepd) in 2011 to 300 MBoepd by 2017. By moving more rigs to Oklahoma, it should grow its earnings per share (EPS) to $6.97 by 2014. Given the company's proven history in the Bakken, its aspersions in SCOOP are realistic. At a price-to-earnings (P/E) ratio around 22, Continental is a very attractive American growth story. 

Kodiak Oil & Gas (NYSE: KOG) is much smaller than Continental, but it is another good Bakken play. It is expected to decrease its average number of drilling days per well to 17 in 2013 from 32 in 2011, thereby shaving off a little more than a $1 million in average well costs. With its proved reserves in the Williston Basin around 86% crude oil, its future margins will be solid.

While Kodiak's overall profit margin of 17.5% is not as strong as Continental's, Kodiak is still a strong company. Its market cap is only $2.5 billion, allowing Kodiak to pursue small opportunities and still provide substantial growth. It recently expanded its Williston Basin acreage to 196 thousand net acres, giving it plenty of room to boost production and grow its EPS from $0.50 in 2012 to $1.01 by 2014.

Investing with a time-frame of a couple years is enough to ride Kodiak's growth. Given Kodiak's larger growth prospects due to its small size, its P/E ratio around 25 is warranted. 

The Loser

While Canada is traditionally a strong oil exporter to America, declining U.S. imports are putting a damper on the Canadian oil market. In the long term, oil sands producers like Suncor Energy (NYSE: SU) should be fine, as pipelines are built to export Canadian oil to Asia.

Suncor has a number of upgraders that allow it to refine the oil it produces, but recent U.S. shale growth forced the company to cancel its planned Voyager project. Suncor's margins have suffered as it competes in an increasingly crowded market. Its gross margin of 54.9% and profit margin of 7.1% are nowhere near the numbers put out by Kodiak or Continental.

Suncor's long-term picture is more encouraging. The Canadian oil sands are enormous, while America's horizontal wells struggle with production rates that quickly decline. The company is hoping to boost its production by 300 Mboepd by 2020 through upgrades to its oil sands operations and the development of offshore fields in Newfoundland and abroad. 


The U.S. is weaning itself off of oil imports, while China is moving in the opposite direction. Continental Resources and Kodiak Oil & Gas are attractive U.S. growth investments. Continental offers more diversification with its recent expansion into the SCOOP field, while Kodiak's small size should make it easier for the company to double its profits in the next couple years. Suncor has been on the losing side of America's oil boom, but over the coming decades pipelines will be built that will allow the company to sell more oil to China. 

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