Three Ways to Profit From US Oil Production
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In two separate but related reports, Bloomberg News documented the continuing rise of North American oil production to the detriment of OPEC. One report detailed how OPEC as an organization may not survive the next decade unless it finds new markets for its oil. The report also revealed the significant price advantage American refiners have using West Texas Intermediate crude instead of Brent Sea crude. In a video aired on Bloomberg Surveillance, reporter Scarlet Fu showed a graph of US and Canadian oil production surpassing that of Saudi Arabia. Having watched Middle East oil heavily influence American foreign policy and economic health for so long, I can only say, “It’s about time.”
Great, so America is shaking free of OPEC. How can investors make a buck off of all this? Below are three different oil producing companies with three different ways of producing profits. All warrant a look.
Gassing for oil
Denbury Resources (NYSE: DNR) develops oil and gas plays along the Gulf coast and the Rocky Mountains. Denbury’s website proclaims, “Denbury brings old oil fields back to life.” The ability to enhance oil recovery from mature oil fields represents Denbury’s niche in the oil production business. Enhanced oil recovery revolves around injecting or flooding carbon dioxide, or CO2, into oil fields thought to be largely depleted. This process may double the proven reserves in a given oilfield. The company claims to have the largest reservoirs of CO2 in the eastern part of the country from which to inject oil fields. They also claim to be the largest producer of oil and gas in Montana and Mississippi.
Denbury stock has traded in a sideways fashion for almost two years. That may end in 2013. Bloomberg considers Denbury to have a significant gap between its current price and analyst’s projected price. And just how is Denbury going to increase its stock price? Three ways. First, Denbury has acquired property from Conoco-Phillips that should significantly add to its current portfolio of proven reserves. Denbury already reported nicely improved production in Q4 2012 and this acquisition from Conoco-Phillips should contribute to 2013 numbers. Second, Denbury is refinancing debt. In a nutshell, Denbury will replace 9.75% debt with lower yielding notes. No word from the company regarding how much this will save the company in financing costs. Lastly, according to Standard and Poor’s, Denbury is roughly halfway through a planned stock repurchase program. Denbury pays no dividend.
Hedging old oil fields
Another company actively acquiring mature oil fields is Linn Energy (NASDAQ: LINE). The company deliberately acquires known stable producing assets. Production growth may not be stellar, but then, depletion isn’t a problem, either. In 2012, Linn made over $2.5 billion worth of acquisitions and more are planned for 2013. Even better, while growing its portfolio of productive assets, Linn generates savings through its gas collection pipelines and water gathering system in its Granite Wash and other fields in the Texas panhandle. In addition to acquisitions, Linn grows its production organically. They have drilled 25 wells in the Granite Wash, specifically the Hogshooter Wash and the results were so encouraging, the Hogshooter will be a key focus of production for 2013. Linn will also partner with Anadarko to bring CO2 enhanced oil recovery to its Wyoming fields. Time will tell if Linn does as well as Denbury in this activity.
The big key to Linn’s success is hedging its oil and gas production. Linn CEO, Mark Ellis, has described hedging as “the core of our business model.” Others have called it Linn’s “secret sauce” for its financial success. Simply stated, by hedging its production, Linn protects itself from wide fluctuations in energy prices while allowing upside potential. This helps insure revenue year over year. This also doesn’t hurt Linn’s dividend, 7.5% for Linn, a little less for its common stock counterpart, LinnCo.
Good old fashioned oil exploration with an innovative twist
Continental Resources (NYSE: CLR) explores the Bakken and other plays for oil and gas. It does not look for known mature fields like Linn or Denbury; it’s looking for new finds. To be sure, Continental finds new assets. During 2012, the company grew its proven reserves in the Bakken 54% over the previous year. It currently claims top spot as a Bakken oil producer, having achieved a 58% increase in production over the past year. Fortunately, Continental actively explores for oil and gas in other parts of the US, limiting its dependence on Bakken shale oil.
As an investment, Continental shares took a beating over the past summer, but has recovered somewhat in the fall and winter. Why should you invest in Continental now? Two reasons: First, the expanded use of rail to ship oil from Bakken to refineries on the East and West coasts means Continental should receive more revenue for its oil than it has in the past. Second, Continental developed what it calls Eco-Pad technology for drilling. Drilling a well in the Bakken can cost $6-7 million. With Eco-Pad drilling, Continental can drill four wells on one pad at with a cost savings of 10%. That translates into a roughly $2.5 million savings for every four wells drilled. While the company currently trades at roughly 32 times earnings, these two developments should bring increased revenues and profits. Continental pays no dividend.
Final Foolish Thoughts
After decades of depending on oil coming from countries that generally don’t like us, the United States could finally stand free of OPEC. For investors, there are different ways to make money on this emerging oil independence. Continental generates revenue as a classic Bakken oil exploration and production company using its innovative Eco-Pad technology to reduce drilling expenses. Oil transit by rail should also improve earnings. Denbury focuses on its ability to inject CO2 into mature oil fields and its recent significant acquisition to improve its future oil production. Linn Energy/LinnCo also focuses on mature productive oil fields and hedges its oil and gas production to insure revenues and distributions. No matter what your investment style is, there’s an investment for you in US oil production
dylan588 owns Linn Energy. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!