- Money Morning Australia

The Big Oil and Gas Boom in the USA


Written on 28 September 2012 by MoneyMorning

The Big Oil and Gas Boom in the USA

The USA has had a rather rocky relationship with oil. In the 19th century, the discovery of massive reserves of oil set America on course to become a hugely powerful nation. Cities started to flourish. And vast suburbs sprung up as the country adapted to cheap car travel.

More recently, America has had to curb its consumption. The era of gluttonous oil consumption came to an end as the USA became dependent upon imported oil.

The USA began to feel the strain of rising oil prices. When oil spiked during the financial crisis, Americans left their car at home. And industrial oil consumption collapsed.

But now, thanks to two new commercially deployed drilling techniques, the USA is set to free up an abundance of trapped gas and oil. And that could help the US economy back on its feet.

Because, while the glamour boys of the oil industry are heading off to deep waters, and plunging hundreds of millions of dollars down exploratory holes with very uncertain results, plenty of other oil men prefer a low risk play that offers a fast pay-back.

I met one of them last week. Matt Lofgran is chief executive of Nostra Terra Oil & Gas (AIM: NTOG), and before long he was scrawling figures on a piece of rough paper – figures that show just why he is joining the rush for US on-shore assets.

‘An Energy Renaissance’ in America

Make no mistake – America’s energy security has taken a dramatic swing for the better. Goldman Sachs has predicted that America will soon regain its title as the world’s largest oil producer, knocking Russia and Saudi Arabia off the top of the tree.

As I mentioned earlier, this is not down to the USA suddenly stumbling upon new oil fields. No, the real reason is that the ever inventive oil industry has found a way of extracting some of the oil that is known to exist but which has not previously been accessible.

‘America’s renaissance,’ says Goldman Sachs, ‘is down to hydraulic fracturing, or “fracking”. A process that has already significantly changed the gas industry and has been adapted to oil.’

To recap, ‘fracking’ and horizontal drilling are techniques which involve the cracking of rock strata from underground that allows trapped gas or oil to flow freely. Without doubt these methods have significantly changed the gas industry, although not to everybody’s benefit.

The price of gas in the USA has tumbled from over $10/mmbtu to $2.80/mmbtu. This is great news for consumers and is likely to trigger a switch from coal-fired to gas-fired power plants.

But it is not, of course, so good for gas producers and some of these are now in financial difficulties and are off-loading assets at distressed prices.

Targeting a High Oil Price

That sounds like an opportunity for someone, but the easier play today is to apply this same fracking technology to oil rather than gas fields. Although you may think that the gas price and the oil price should move in tandem, in fact they do not. Logistical and other considerations mean that while there is effectively a world price for oil, gas prices are set locally.

Today, the price of gas in the USA is low, but the price of oil is still high so it makes sense to target the latter. Throughout North America from the Red Earth and Swan Hills fields of Alberta, to the Woodbine and Eagleford properties of Texas, old fields are being reworked with the new techniques of fracking and horizontal drilling.

To get an idea of how profitable this can be, Lofgran referred me to the website of SandRidge Energy (NYSE:SD) which has licences in Texas and Oklahoma.

In its ‘Operational Guidance’ Sandridge quotes lifting costs of $15-$17 per barrel of oil; ‘DD & A’ (depreciation, depletion and amortisation) costs of $18.25-$20.20 per barrel; ‘General and Administration’ costs of $5.85-$6.50 per barrel; production taxes of $1.75-$1.95 per barrel; and interest expense of $8.70-$9.60 per barrel.

Add up the mid-point of those numbers and you get a figure of $58.575 per barrel, all in, which leaves a healthy profit margin on each barrel sold for $90 plus.

For separate projects, Sandridge quotes Internal Rates of Return of 62% and 82%, which look highly attractive under any circumstances but especially for what is essentially quite a low risk play.

There Could Be a Stampede

Of course there are a few reasons for caution. Where there is a stampede into a sure thing you can bet that eventually some will overpay for their entry ticket. Depletion, the rate at which the flow of oil subsides, is not entirely predictable. And if the USA finds too much oil, it could just throw the whole world market into imbalance and sink the oil price.

But for the time being the outlook is rosy.

Tom Bulford
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

In Defence and Praise of ‘Cranks and Crazies’
21-09-2012 – Kris Sayce

We Buy Gold Because We Don’t Trust Them Not to Meddle
20-09-2012 – Kris Sayce

Why Share Trading is ‘Mental’
19-09-2012 – Murray Dawes

A Bear Market Where You Least Expect
18-09-2012 – Greg Canavan

Questionable Easing 3
17-09-2012 – Dr. Alex Cowie



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

MoneyMorning
At Money Morning our aim is simple: to give you intelligent and enjoyable commentary on the most important stock market news and financial information of the day - and tell you how to profit from it. We know the best investments are often the hardest to find. So that's why we sift through mountains of reporting, research and data on your behalf, to present you with only the worthwhile opportunities to invest in. Become a more informed, enlightened and profitable investor today - by taking out your free subscription to Money Morning now.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.



FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia


These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom


This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…


The plan centres round three specific stocks.


To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'


The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?


Don’t sweat it. Click here for the next best thing…


World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3591.029+33.993 - +0.96%
  • ^FTSE6703.00+28.26 - +0.42%
  • ^AORD5515.500+13.300 - +0.24%
  • ^AXJO5531.000+13.200 - +0.24%
  • AUDUSD=X0.9265
  • USDJPY=X102.3115

Graphic Ad 1 – Blue Chip Stocks Report


Revolutionary Tech Investor

This report is about TECH MOON-SHOTS


Four of them, to be precise.


It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.


For four more tech moon-shots, click here.

Gowdie Family Wealth

WARNING:
The worst mistake you can make when handing wealth on to your kids


This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.


And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.


Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST


Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.


This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.


You could lock in up to $20,000 a year - and that's just the start. See how here.



Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years


Greg Canavan
doesn't make forecasts like this often.


When he does, it's because he’s found something that could make you money for years to come.


Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted


Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week


In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Two days from now Australia will get a taste for what happens in American sports stadiums every day [Read More...]

Would you approve this chemical? Would you allow this to come to market? Table salt would simply not [Read More...]

If these lessons can be passed onto the next generation, what a world it would be. Healthier, genuin [Read More...]

3D printing is changing medicine, consumer products, art and manufacturing. The impact it’s having o [Read More...]

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

It was necessary just to stay in the same place. Take it away, the US stock market crashes...and the [Read More...]

The end of Australia’s recession-less run is waiting somewhere. Even the US is due for another reces [Read More...]

You can see the property cycle and how it moves and turns, all around you. Get used to it. Australia [Read More...]

A high Australian dollar means we’re doing well at exporting. A low one means our trade balance is l [Read More...]

From the invasion of the Philippines to the Vietnam War…the US empire was financed by the rich, prod [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery