by David Fessler, Investment U Senior Analyst
Thursday, August 11, 2011
Earlier this week, markets plummeted to levels not seen in years. Selling was indiscriminate. Investors ran for cover and pulled the sheets over their heads, waiting for the boogeyman to go away.
On Tuesday he did, but he reappeared on Wednesday. Perhaps one of the more interesting events has been the rout in the crude oil markets. West Texas Intermediate (WTI) crude oil settled out at $78 on Tuesday.
However, that price was short lived. Wednesday’s crude oil inventories report showed U.S. crude supplies down 5.3 million barrels, much lower than expected. Gasoline supplies were down 1.6 million barrels.
Regardless of what the day-to-day markets are doing, the long-term outlook for oil remains bullish, particularly in light of a continued, steady increase in global demand…
Natural Gas Drillers Shifting to Liquid-Rich Shale
It’s especially true here in the United States, where most of the large natural gas drillers have shifted over to the liquid-rich areas of shale plays.
As evidence of that, take a look at the following graph from the Energy Information Administration (EIA).
It clearly shows the dramatic rise in crude oil and condensate production, particularly from the Barnett and Bakken shale formations.
The most interesting part of this graph is that the 2009 number of about 55 million barrels is going to seem very small in just a couple of years.
All of the plays listed in the graph – plus a few more not shown – have acreage that’s rich in liquids. Some more than others. That’s where the drillers have moved their rigs to, and they’re actively drilling there.
Why? With natural gas prices around $4.00, there’s a lot more money in the liquid part of the plays for the drilling companies, and that’s what they’re targeting.
Its recoverable reserves keep rising, too. Continental Resources (NYSE: CLR), the top producer in the Bakken, estimates recoverable reserves of as much as 24 billion barrels of oil buried there.
Right now, Bakken is limited to about 800,000 barrels per day, but new designs for increasing the pipeline infrastructure will raise overall capacity to about 1.1 million barrels per day in just a few years.
What About Other Shale Oil Areas?
While the Bakken is certainly a hot area right now for liquids, other shale plays previously known for natural gas production are now producing significant volumes of liquids:
Chesapeake Energy (NYSE: CHK) expects 50 percent of its increase in revenue in 2011 to come from increased liquids production in the Marcellus shale formation.
Drilling for shale oil is big business. Baker Hughes, Inc (NYSE: BHI) indicates in their weekly rig count that there are currently 1,099 rigs drilling horizontal wells in the United States. That’s an increase of 19 from the prior week and 221 from the year before.
While Hughes doesn’t break out rigs that are specifically drilling horizontally for oil, its U.S. oil rig count is up 420 from a year ago. We can certainly infer that a lot of those rigs are horizontal units operating in the shale plays.
With natural gas prices still near historic lows, the best profitable plays will be in companies who are and will continue to be drilling and producing in the liquids-rich shale plays in North America. They include, but aren’t limited to, the two companies mentioned above.