The Great Oil Rush of 2012
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wall St. Crash, Take 17.
Only months had passed since the collapse of Lehman Brothers before another bogeyman raised its head: Peak Oil. The world was running out of oil, and fast. Any day now we would be thrust into an apocalyptic Mad Max Beyond Thunderdome future where only bullets and beans would be truly reliable investments.
This made-for-Hollywood conclusion was self-evident: There's only so much petroleum in the Earth's crust, and humans consume about 85 million barrels a day. Eventually, there wouldn't be any economically viable oil left to extract. In fact, most people believe that all of the Earth's natural riches are doomed to disappear, picked clean by the industrial revolution and squandered by gas guzzlers made in Motor City.
So it came as something of a shock when the International Energy Agency announced a few days ago that the U.S. now projected to overtake both Russia and Saudi Arabia as the world's #1 energy producer by 2017. The IEA also predicted that North America would be virtually energy independent by 2025 – all thanks to the virtuous combination of new hydraulic fracking techniques and better gas mileage.
Spot price of crude oil and net long position of managed money traders, 2006-2011
Let's take a look at three of the more promising contestants in the Great Oil Rush of 2012: Marathon Oil, ExxonMobil, and Kinder Morgan.
Marathon Oil (NYSE: MRO) is perhaps the strongest contender on our list. Not only has Marathon put virtually all of its chips (80%+) into the North American shale oil market, the company was on the ground floor early enough to have First Mover advantage.
Marathon has massive acreage positions in three major North American plays: The Eagle Ford (230,000 core net acres), Three-Forks/Bakken (410,000 net acres), and the Oklahoma Resource basins (220,000 net acres).
Marathon's Eagle Ford holdings are currently the most impressive, with production doubling over the last quarter on higher-than-expected density. With a 40-year well rate life, Marathon is sitting on an estimated 1 billion BOE (barrel of oil equivalent) in Eagle Ford alone, with a peak rate of 50,000 BOE per day.
Marathon's combined acreage in the Oklahoma Resource basins are estimated to produce an additional 1 billion BOE, potentially rivaling Eagle Ford. In addition, recoverable resource estimates for the company's Three Forks/Bakken play have skyrocketed over the last 2 years to nearly 500 million BOE.
Wall St. appears to have finally caught on to the windfall opportunity that Marathon presents as the company's revenues beat the Street in Q3, clocking in at $4.16 billion (Wall St. consensus estimate: $3.5 billion.). Marathon's U.S. E&P has increased 57% from Q2 to Q3 2012. The company has gradually increased its dividend by 17% over the last 5 years. The stock has been recently upgraded to outperform by analysts at Credit Suisse with a $40 price target. Global Hunter upgraded MRO from “accumulate” to “buy”, with a price target of $40. Societe General and JPMorgan Chase have both followed suit, with $36 and $35 targets, respectively.
At the other end of the scale is ExxonMobil (NYSE: XOM), one of the six largest multinational oil companies in the world. The current glut in natural gas inventories has forced Exxon to put its natural gas (Nymex: NG) operations on hold for the moment in favor of shale oil fracking opportunities in North America. One of them is the Utica shale in Ohio.
The Utica shale – residing at various depths of 2,000-14,000 feet under most of West Virginia, Ohio, Pennsylvania and New York, extending as far north as Quebec and as far West as Tennessee. Exxon's experience with long-reach wells makes Utica shale a natural fit for the supermajor. After a whirlwind negotiation between Exxon subsidiary XTO Energy, Beck Energy and Wellington Resources earlier this year, Exxon has acquired development rights to 25,000 acres in Monroe County, Ohio. Taken together with neighboring Belmont County, the supermajor's total Ohio acreage comes to a whopping 52,334 acres in Ohio alone.
Exxon's second major Utica purchase is centered on Wheeling, West Virginia. The Wheeling News-Register in West Virginia reported Sept. 17 that leases where signed for $4,950 per acre and 19% on production royalties. The size of the West Virginia play is currently undisclosed.
Both locations will add to Exxon's play in Marcellus Shale in Pennsylvania, which Exxon acquired after last year's purchase of XTO Energy.
Mark Twain once remarked that a gold rush is a good time to be in the pick and shovel business. No matter who comes out on top of the Great Shale Oil Rush, Kinder Morgan Energy Partners (NYSE: KMP) will be a winner. Shale oil has to be shipped to be sold.
Kinder Morgan currently operates five crude oil transport systems: the Corridor pipeline system, which links the Albian Sands' Muskeg River Mine in northern Alberta to the Scotford Upgrader near Fort Saskatchewan and to a terminal in Edmonton, Alberta; the Trans Mountain System from Alberta to British Columbia and Washington State in the US; and the Express/Platte systems from Alberta to the US Rocky Mountains and US Midwest.
Kinder Morgan and Phillips 66 have agreed for Kinder Morgan to transport crude oil and condensate from the Eagle Ford Shale in South Texas to Phillips 66's Sweeny refinery in Brazoria County. Kinder Morgan plans to build a 27-mile, 12-inch diameter pipeline that will extend an existing crude and condensate pipeline. Historically, Kinder Morgan's dividend yields have been impressive, with consecutive dividend increases over the past 15 years. With the ink on a new 25 year natural gas transportation barely dry, a Mexico pipeline deal in the works and the approaching release of the company's 2013 budget, Kinder Morgan is poised to outperform in 2013.
The renaissance of North American oil and natural gas production will result in windfall profits for the handful of energy companies that are in a position to reap them. The three companies we've just examined all have a solid track record of generating value for their shareholders; but also – and perhaps more importantly – each enjoys unique advantages that many of their rivals lack: Marathon focused almost exclusively on the North American market, and won the jackpot with Eagle Ford. Kinder Morgan is the ultimate middle-man in a market where the barriers to entry are both time consuming and steep. Exxon has the deep war chest, acquisitions, boots on the ground and long-reach drilling experience to succeed where other deep pocketed competitors have failed. These three companies are the leading edge of the Great Oil Rush of 2012.
FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. 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.If you have questions about this post or the Fool’s blog network, click here for information.