The Boom is Real: Silencing the US Energy Skeptics

Back in 2001 the “dot-com” bubble crushed investors. Apparently “pets.com” or whatever, wasn’t worth the zillions of dollars that investors were willing to pay.

Last week I received a disturbing correspondence that implied the shale sector may be the next bubble to pop.

Let’s use this reader mailbag to set the record straight. And in the meantime we’ll check in on one of our favorite investment ideas…

We opened the mailbag last week and found a gem! The reader comment below comes in response to a recent issue of Daily Resource Hunter titled “The Unsung Hero of the US Energy Boom”. Here it is in full:

“This is little more than hype.When the energy costs used to extract, process, and transport the natural gas are higher than the energy content of the gas when it gets to the end user you have a process that destroys capital.

“This is why the SEC filings are showing that the shale producers of gas and oil are still cash-flow negative and unable to generate a true economic profit. What we have is a financial sleight of hand game that hides the real picture in the sector.

“As accountants continue using the EURs as the basis of their depreciation costs companies can report small losses or even profits. The trouble is that the actual ultimate recovery rates are much lower and that many wells that have yet to be depreciated are no longer producing a positive cash flow.

“That means that we will see the type of write-offs that Agora analysts accurately predicted in the tech sector. I guess the old analysts must have moved on and the new ones are more interested in hype than actual research.”

Time to rub my little Tuesday morning eyes!

I’ve been accused of over-hyping things in the past, but when it comes to America’s energy comeback the so-called hype is well-warranted. Let’s discuss.

Your editor agrees with some of our above reader’s commentary. No industry has a chance to prosper if you can’t produce your final product with less energy and capital than it takes to get it out of the ground — heh, barring the government-mandated ethanol industry, of course.

…not all oil and gas players are what they’re cracked up to be. But that doesn’t mean the shale industry is an over-hyped shell game.

But to be honest, poking holes in the shale boom was what we were trying to do back in 2010 and 2011. Back then we were starting to see the first wave of shale oil and gas production. It was unbelievably great.

Back then, costs were high. And production was still untested. Depletion was also a major question (depletion, fyi, is a physical phenomenon found in every well, where a deposit produces less oil or gas over time.)

Truly, a few years ago, there were more questions than answers.

And some companies since then have, indeed, been over-hyped. The prime example would be Chesapeake Energy (CHK.) Chesapeake was the industry’s darling. In the beginning of the shale craze the company bought up acreage with both fists. Fact is, at some point you could have considered them a land management company instead of an oil or gas play.

The shotgun approach, however, hasn’t panned out for Chesapeake. Over the past 5 years the company is sporting a modest gain of 39%. For reference the S&P index is up nearly 100% in that same time frame.

Another sector that we can currently lump into the shale losers pile are “big oil” players. As I’ve said before the big fully integrated companies have their hands in too many cookie jars. They’re onshore, offshore, Middle East, non-Middle East, researching biofuels, etc. — but they aren’t a pure-play shale producers.

Truly, I’ll be the first to admit that not all oil and gas players are what they’re cracked up to be. But that doesn’t mean the shale industry is an over-hyped shell game.

Today, we have much more data than we did in 2010 — questions are being answered. And the answers are reaffirming — if not outright strengthening — my excitement for America’s shale plays.

There is no accountant “sleight of hand” here. The right companies (most of which are in the oily sweetspots right now) are making money had over fist.

In fact, shale plays across the country continue to beat expectations.

“North Dakota’s rapidly rising oil output continues to defy the skeptics” Reuters reports.

“In practice” the article continues, “the shale skeptics have proved wrong on every point, revealing a fundamental lack of understanding about the geology, economics and technology of shale production.”

The estimated ultimate recovery (EUR) for many of these shale plays are playing out far beyond the most-positive of expectations.

From a pure profit standpoint, the production that we’re seeing from the well-run companies is paying off, too. It’s much more straight-forward than you’d think — or the reader comment above would have you believe.

Think of it this way…

Most of the shale wells being produced today cost anywhere from $5-10 million. A good well can produce 500-1,000 barrels of oil per day (bpd) during its first year. This isn’t a prediction, it’s happening in the field today — we’ve got thousands of wells as proof.

So if you take production of 500-1,000 bpd and oil currently trading at $100/barrel, you’ll see that some of these wells are fully paid off within three to six months! Even in the face of natural depletion, that means all of the oil production from, say, month six onward is gravy.

It’s no wonder that rifle-focused companies in America’s shale sweetspots are cashing in.

One company that we’ve highlighted several times is Pioneer Resources (PXD) — Pioneer was on our list of companies that we feel could become “the next Exxon.”

Unlike Chesapeake or other players riding on the shale boom’s coattails, Pioneer is blazing a profitable trail in U.S. shale. This is a company that’s “walking the walk.”

Over the past five years, while Chesapeake has gained 39% and the S&P has gained nearly 100%, Pioneers shares are up 646%. If you go back to the company’s lows in 2009 the company’s shares traded as low as $12. Today they’re trading for $220 — that’s a 17 bagger.

That’s not a “pets.com” run-up, either. This company is spinning cash, lots of it. They’ve locked in the prime acreage in a few of America’s shale hotspots — plus, costs and drill time are still dropping. Indeed, Pioneer (and companies like it) are the real McCoy in America’s energy comeback.

Back to the readers comment above — and don’t get me wrong, I love the comments so please keep em coming — it’s not accurate to compare the shale boom to the dot-com bubble.

Bubbles come and go, but booms have lasting power. The gains that we’re seeing from well-run shale players are going to continue to roll higher. That’s today’s undervalued opportunity. And although natural gas has yet to join the profitable shale party, that day will also come (also providing a solid chance to profit by going against the crowd!)

Let’s raise our glasses and give hearty cheers to the Agora analysts that called the breaking of the dot-com bubble! And here’s to those that are set to make a killing from the next misunderstood opportunity: America’s shale boom.

Keep your boots muddy,

Matt Insley
for The Daily Reckoning

Ed. Note: Clearly there are going to be competing theories when it comes to any exciting new investment story. Who’s proven right will come down to the quality of their research. And Matt does some of the most extensive and in-depth analysis around, often gaining first-hand knowledge straight from the source. He knows the intricacies of the US oil boom story better than almost anyone, and he’s leading his Daily Resource Hunter readers to some incredible chances to profit. If you’re not reading The Daily Resource Hunter, you can sign up for free, right here. Every morning you’ll get an email sent directly to your inbox that explains just what’s going on in the resource markets, complete with no less than 3 chances to learn about unique and actionable profit opportunities. And since it’s free, you’ve got absolutely nothing to lose. So don’t wait. Your next issue is just a few hours away. Sign up for FREE, right here.

Original article posted on Daily Resource Hunter