Unconventional Oil Production: The Wave of the Future
Conventional oil production peaked over 5 years ago. With that being said, unconventional oil production has come to the for front of oil industry. If you are hesitant to invest in unconventional oil, you may want to reconsider. U.S. unconventional oil production can be prime investments, and Devon Shire has 7 reasons why.
1) Little political or physical risk – I want oil exposure and I like to buy those assets at a discount, but I want to be able to sleep at night. Therefore I’m most interested in being invested in companies that operate in North America where for the most part government action or violence is not a large concern. There are plenty of unconventional oil resources inside of North America that are just starting to be developed.2) Avoid the risks involved in deepwater exploration and production – While I don’t feel adventurous enough to invest in reserves in unstable countries, I also don’t feel particularly comfortable owning oil reserves and production that involve operating in miles of water with expensive infrastructure that is in the path of major hurricanes. Unconventional oil plays allow me to avoid being exposed to another Macondo style event.3) No exploration risk – I love the idea of owning an oil company that hits on a giant oil discovery that immediately triples the value of the company. The reality is though that the wildcat oil exploration is high risk, and I have no ability to assess the likelihood of a successful outcome. These unconventional oil plays on the other hand are resource plays that have a broad areal extent and very little exploration risk. That is why you see companies like Petrobakken (PBKEF.PK) in Canada with a 99% success rate when drilling wells. They are basically repeatable manufacturing like operations.4) Potential for large increases in the amount of oil recovered from enhanced oil recovery techniques – Profitable production from unconventional oil resources is relatively new. The Bakken in Canada for example did not produced economically until 2005/2006 when horizontal drilling with multi-stage fracturing “cracked the code” in this play allowing for sufficient rates of production to allow for an attractive return on investment. As these technologies and the plays themselves are young, every year sees improvements in technology and techniques that make these resources more valuable…5) Undeveloped acreage tends to be undervalued by the stock market – Despite the positive things I have said already about these unconventional resource players, I would not be interested in them unless I thought they were undervalued by the stock market. What I am finding in many cases is that the stock market values these companies based on existing production and is slow to acknowledge cases where a company holds huge parcels of undeveloped land within established boundaries of a particular resource play…6) Light oil production – Unconventional oil production results in a very high value light oil. Alternative means of gaining exposure to future new oil resources that I have looked at usually involves looking to heavier grades of oil. Heavier oil requires the cost of diluting to allow it to be transported through a pipeline and also is expensive to refine. Having a more valuable light oil puts these unconventional producers in much better shape to weather the cyclical nature of the oil business.
7) Consolidation of smaller players provides a likely avenue to realize value – Canada specifically has a number of emerging unconventional oil plays. These include the Viking, the Cardium and Swan Hills. In these plays are a number of very small publicly traded companies that have amassed enviable land positions. These companies are obvious acquisition targets and based on recent transaction multiples several of them have considerable upside. Companies that interest me include Arcan Resources (ARNBF.PK) , Second Wave Petroleum (SCSZF.PK) , Bellatrix Energy (BLLXF.PK) and Westfire Energy (WFREF.PK). The only thing better than buying undervalued securities is buying them with a catalyst to realize that value sooner than later. I believe several of the above mentioned companies will be acquired in the coming two years.