Playing the Shale Energy Landgrab

by Aaron Levitt | January 9, 2012 7:30 am

The U.S. and Canada are now sitting on one of the biggest energy booms ever. An oil and gas production renaissance is underway, thanks to improved “hydraulic fracturing” and new advances in drilling techniques. Though not without controversy, shale formations like the Marcellus, Utica and Eagle Ford have become hotbeds of North American drilling activity because these advances have made it possible to extract the plethora of fossil fuels trapped between the rocks.

With billions of dollars worth of revenue at stake, these regions have witnessed a landgrab not seen since the California Gold Rush of the 1800s. While the usual suspects like Exxon (NYSE:XOM[1]) are staking their claims, North America’s shale interests are getting plenty of attention from overseas sources as well.

Surging Global Interest

Indeed, landholders across the Northeast, Nebraska and Texas are getting some new foreign neighbors[2]. The shale boom and all its riches have been attracting energy firms from around the globe. Take French oil giant Total (NYSE:TOT[3]). The major integrated oil firm recently paid $2.32 billion for a 25% share in 619,000 acres across the Utica shale owned by Chesapeake (NYSE:CHK[4]).

This is the second joint venture between the two firms, and it gives Total access to the nearly 5.5 billion recoverable barrels of oil and 15.7 trillion cubic feet of natural gas that the Utica formation contains. However, the Total-Chesapeake deal is just one example[5].

Also last week, China’s Sinopec (NYSE:SHI[6]) made its first incursion into U.S. shale with a $2.2 billion investment to create a joint venture with Devon Energy (NYSE:DVN[7]). Over the past year, shale acreage has seen buyout and merger activity from Australia’s BHP Billiton (NYSE:BHP[8]), Norway’s Statoil[9] (NYSE:STO[10]), various Chinese state-owned entities and Malaysia’s Petronas.

Overall, data compiled by Thomson Reuters showed over $473 billion in energy asset transactions were completed in 2011.

It’s no wonder why North America’s shale assets are becoming such a hotbed. Growing populations require major amounts of energy. Securing these assets now, while prices are relatively cheap makes strategic sense for any nation or company.

In addition, many of the acquiring international firms are behind the curve in terms of drilling technology. In a classic win-win, smaller to midsize domestic energy firms get the capital they need to actually tap these resources, while the foreign corporations get the future energy supplies they require. With a little luck, the U.S. and Canada gain some economic prosperity and jobs, with a minimum of environmental disruption.

Getting Exposure

This pattern of joint venture/buyout should continue to play out over the next few years. For energy investors, that could spell opportunity. Shares of both Devon and Chesapeake surged 4% and 3.4%, respectively, when the news of their deals broke. Analysts at UBS cite both Cabot Oil & Gas (NYSE:COG[11]) — which just hiked its dividend[12] —  and EOG Resources (NYSE:EOG[13]) as the next major M&A targets.

However, investors may want to think a little bit smaller and broader. The Jefferies TR/J CRB Wildcatters E&P Equities (NYSEARCA:WCAT[14]), along with the PowerShares S&P SmallCap Energy (NASDAQ:PSCE[15]), track baskets of various small-cap oil and gas firms that could make juicy targets for the foreign energy majors. These ETFs could provide an overall play on the trend.

Here’s another tack: Small caps PDC Energy (NASDAQ:PETD[16]) and Rex Energy (NASDAQ:REXX[17]) could be exactly what foreign firms are looking for. Both have market caps just under a billion dollars and both have been expanding their shale acreage. This past September, PDC added exposure to the Utica shale and is actively seeking a partner to fund drilling on 100,000 net acres. And Rex continues to add acreage across the Marcellus, Niobrara and Utica shale formations and is seeing higher production from its wells.

With long-term energy demand trends firmly in place, North America’s shale formations will continue to be a prime destination for the international oil majors. These firms, flush with cash, will be able to provide the necessary funds to extract this energy. For investors, playing the landgrab means betting on the small to midsize firms within the exploration and production sector. The companies discussed here, along with the ETFs, are great ways to do that.

 Aaron Levitt doesn’t hold any of the stocks or funds mentioned here.

  1. XOM:
  2. new foreign neighbors:
  3. TOT:
  4. CHK:
  5. just one example:
  6. SHI:
  7. DVN:
  8. BHP:
  9. Norway’s Statoil:
  10. STO:
  11. COG:
  12. just hiked its dividend:
  13. EOG:
  14. WCAT:
  15. PSCE:
  16. PETD:
  17. REXX:

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