Another Big Texas Oil Play?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The great state of Texas already produces approximately 30% of all oil in the United States. Over the past two years there’s been growing buzz about the Cline shale play in the Texas Permian Basin. Specifically, the Cline may hold 30 billion barrels of recoverable oil. In contrast, the Bakken in the Dakotas holds roughly 7.4 billion (at last check) and the Eagle Ford in Texas holds 853 million barrels. Here are three companies developing Cline shale assets.

Gas shifting to oil

Devon Energy Corporation (NYSE: DVN)has been realigning its operations towards a more balanced mix of natural gas and oil production. Their Cline shale assets fit nicely into this strategy. During its presentation at the latest UBS Global Oil and Gas Conference, Devon management highlighted growing oil production not only from its Permian Basin assets, but its Mississippian Lime and Canadian oil sands assets. The Permian Basin production was particularly impressive. The company has yet to outline its expectations for its Cline shale play.

These positive results contrast with other company operations. Of note, Devon’s foray into Utica shale gas produced virtually nothing and the company wisely moved on. Others note Devon’s track record for converting untapped reserves into oil for sale underwhelms. Also underwhelming is Devon’s plans to create a master limited partnership from its midstream operations. As reported by Reuters, the announcement produced yawns from Wall Street. Throw in declining quarterly earnings growth and $12 billion in debt versus $6.5 billion in cash, and it’s no wonder Devon’s stock currently trades near its five years lows.

Range Resources Corporation (NYSE: RRC) joins Devon as a natural gas company balancing its energy portfolio with Cline shale oil. Like Devon, Range acquired substantial natural gas assets, notably in the Marcellus Shale and produces growing volumes of gas and liquids there. Range’s low production costs allow it to profit from gas sales despite historically low prices. At the moment, Range produces modest oil volumes from the Cline. Rather than rush into developing this asset, Range seems content to wait for other companies to drill wells in the play. If their production looks good, then Range may invest more aggressively in Cline shale.

The company’s latest presentation forecasts a rosy future of increased production, decreased costs and growing profits. Which raises the question: Why are insiders selling and not buying? For starters, Range’s capital expenditures exceed cash flow and thus will require some combination of debt or asset sales to fund. Further, Range also depends heavily on natural gas sales and prices remain under pressure. Lastly, while revenues climbed over the past three years, earnings oscillated between profits and losses. None of these bode well for the company.

A turnaround in the making?

An unquestionable oil producer active in the Cline is Apache Corporation (NYSE: APA). Apache decided that the good ol’ US of A represents a better land to invest in than, I suppose, Argentina. So Apache has begun identifying and selling $4 billion in assets to repay debt, repurchase shares and “enhance financial flexibility.” I suspect this means improving their ability to develop assets in the Cline and other US plays. One foreign asset not likely going anywhere is Egypt, which produced $1.5 billion in excess cash for the company this past year.

Right now, Apache produces oil from 13 drilling rigs in the Cline with more exploration on the horizon. For the rest of 2013, Apache plans on drilling 28 additional wells to tap into an estimated 642 MMboe of hydrocarbons. The company also plans on adding more Cline acres to its portfolio. All of this adds to Apache’s increasing production from the greater Permian Basin.

So why is Apache selling near its 5-year lows? I suspect two reasons. First, uncertainty in Egypt. There are no reported production interruptions despite the turmoil, and I suspect Egyptians of all political stripes know they need oil revenue; still, political instability never plays well on Wall Street. Second, disappointing earnings. Despite increased production and reserves, earnings dropped in 2012 relative to 2011. This resulted in cuts in executive compensation. Was this a pre-emptive strike against activist shareholders emboldened by developments at Chesapeake Energy and SandRidge? Perhaps, but at least management felt some accountability. Let’s hope the pay cuts will spur improved earnings.

Final Foolish Thoughts

Of the three companies outlined here, I like Apache the best. This company looks beaten down by past poor performance and uncertainty in Egypt. If management executes its planned asset sales and oil production continues to climb, I believe improved earnings will follow. Similarly, Egypt is experiencing turmoil, but the country needs money and Egyptians know it. I suspect no one there wants to hurt the oil industry, especially with new finds that could further help the country. Add the company's plans to reduce debt and repurchase shares and Apache stock looks good for the future.

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Robert Zimmerman has no position in any stocks mentioned. The Motley Fool recommends Range Resources. The Motley Fool owns shares of Apache and Devon Energy. 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!

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