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Pure Plays for Shale Oil



January 10, 2014 – Comments (0) | RELATED TICKERS: WLL , CLR , EOG

Board: Value Hounds

Author: saunafool

Seriously, I don't know why I didn't think of it earlier. I work in the oil patch (downstream) and have been harping about how shale oil is a game changer for about 18 months.

But, as my recent post suggests, production from shale oil in the U.S. is only just beginning. Production will likely grow through about 2035 and perhaps beyond, although growth rates will certainly be lower than current levels. A recent Goldman Sachs analysis believes the Bakken Crude production will exceed 2 million bpd sometime around 2023 and then begin a slow decline. Eagle Ford is probably not too far behind both in terms of production rates...

Permian Basin, Niobara, Utica, and Monterrey shale formations, however are just beginning to show promise. In many cases, we're talking about exploratory wells being drilled. Estimates in these places are quite optimistic that at least some of the success of Bakken and Eagle Ford can be repeated (albeit on a smaller scale with the exception of Monterrey which is huge but has yet to get beyond a few exploratory wells).

I did some research into which companies are the most "pure" plays for shale oil production and came up with the following 3:

Whiting Petroleum (WLL)
Continental Resources (CLR)
EOG Resources (EOG)

Here are some basic stats on each company:

Market Cap: $6.91B
Net Debt: $1.97B
Enterprise Value: $8.88B
Price: $58
EPS (2013): $4.20
Production (MBOE): 92.8
Proved Reserves (MMBOE): 396.3

Market Cap: $19.5B
Net Debt: $4.5B
Enterprise Value: $24B
Price: $106
EPS (2013): $5.54
Production (MBOE): 141.9
Proved Reserves (MMBOE): 1099 (est)

Market Cap: $45.59B
Net Debt: $5B
Enterprise Value: $50.59B
Price: $167
EPS (2013): $7.18
Production (MBOE): 235
Proved Reserves (MMBOE): 2350 (est)
Dividend Yield: 0.4%

Valuation of production companies is a challenge. Traditional metrics like P/E ratios and Earnings Yield only tell part of the story. The more important questions are: how much oil do they have in the ground? How fast are they growing their reserves? How fast are they producing compared to their reserves (Reserve Life)?

Here is what I found on my first pass:
Traditional Metrics

P/E: 14
Earnings Yield: 7.2%

P/E: 19
Earnings Yield: 5.2%

P/E: 23
Earnings Yield: 4.7%

Oil Field Metrics
Here is where it gets a bit more interesting

Enterprise Value/Proved Reserves
Whiting: 22
Continental: 22
EOG: 22

Production Growth Rate (est. last 2 years)
Whiting: 17%
Continental: 40%
EOG: 10% (But they have been growing oil at 40% and reducing gas--from about 50% gas production a few years ago to 12% in 2013).

Reserve Life (Years)
Whiting: 12
Continental: 21
EOG: 27

Additional Notes: All 3 are growing both production and reserves with Continental and EOG delivering huge growth rates in oil production over the last couple years. Estimates for EOG and Continental both show significant increases in EPS for 2014 (16% for EOG and 30% for Continental). Whiting has EPS forecasts all over the map for 2014 (from less than $2 to almost $6/share) but the average is for 0 growth.

My Picks:
Whiting and Continental

From viewing their online presentations and reading the last annual report, I was able to find all of the relevant information on production, reserves, and growth rates quite easily. They are currently implementing a new fracking method which is doubling the production rate from new wells, and I suspect there is more potential for them to surprise to the upside than downside. Shares have been moving mostly sideways for 3 years after a big run into 2010/2011. Reserve Life is lower than the others, but reserves are growing faster than production (for all 3 companies) so this number will be increasing.

They are the pioneer in the Bakken Formation. You have to pay for the growth, but the growth is there and likely will continue to be there for another decade. At this point in the cycle, they are simply repeating and improving upon what they have been doing for the past decade or so. The only thing they need to do to increase production is wash, rinse, repeat.

They are the top producer in Eagle Ford and project they will be one of the top US oil producers in the next few years. I would rank them 3rd of the 3 companies for investment because they are trading at higher valuation multiples than Continental with a slower growth rate.

Comments from people with experience upstream are welcome. Where possible, I pulled numbers from the company filings, but some of the general numbers are from Yahoo Finance with the potential for errors which may result.


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