U.S. shale plays granted early-investors a heap of profit opportunities.
One of the hottest “hot spots” is the Eagle Ford in South Texas.
Heck, over the past decade oil production for the state of Texas has doubled – up from 1.1 million barrels per day to over 2.2 million. Most of that jump in production can be attributed to shale plays, in particular the Eagle Ford.
This unexpected boom has created a lot of millionaires – land owners, small oil startups and certainly investors. Today we’ll take a look at this booming region and update one of our favorite companies…
But first, let’s check in with our friend Mr. Crude.
As I’ve said on countless occasions we’re in the midst of an on-going cycle for crude prices. Crude is “range-bound” the traders would say. Let me explain.
Newfound U.S. supply, via shale development, is creating a relative ceiling on prices. That is, with more oil and gas flowing through the pipelines of North America there’s enough supply to keep a cap on prices. Indeed, the volume isn’t enough to kill the price of crude, but the added supply is having a profound effect on future price scenarios.
On the other end of the spectrum, increased demand from emerging markets combined with occasional Middle East conflict is creating a floor on crude prices. In other words, once the price of oil starts heading too low it’s quickly spurred higher by increased buyers from Asia or turbulence in the Middle East (the latter point is something we recently discussed as “The Middle East Effect.”)
The latest ceiling for prices looks to be around $100 for U.S.-based West Texas Intermediate (WTI) and the floor on prices looks to be stabilizing around $90. Take a look:
This range is a blessing for traders, oil companies and consumers alike. With a goldilocks price of oil – not too high, not too low – the economy can continue to chug along. That wouldn’t be the case if we saw oil oscillating up and down from $30 to $150 – on both ends of that scale global markets are in trouble.
But in the middle, the sweet spot, things are much better.
I even lump consumers into the benefit category simply because we’re all better off when the economy is stable – after all, what good is $2 gasoline if we have to venture through a 2008-style meltdown? Sure, you’re gas is cheap but the same downdraft would likely hit your retirement savings.
Playing this goldilocks scenario is simple. By banking on a relatively stable price of oil for the next nine months we can zero in on our favorite low-cost producers along with our favorite dividend plays.
This brings us back to our discussion of the Eagle Ford.
One of the companies we’ve covered in the region is DCP Midstream (DPM.) On the surface the company looks to be a natural gas play, but when you dig into the books you’ll see the company is the top producer of natural gas liquids (NGLs) in the U.S. – with a 17% market share.
It’s critical to note that NGLs trade at a price ratio to crude oil, not to natural gas. So while everyone else discounts this play as a natural gas company, we can rest assure that their profits are coming from the NGL/crude relationship.
With crude in the $90-100 window, DCP Midstream can make a killing. Here’s a look at the company’s performance as crude remains “range-bound”:
You can see that the company’s shares trade in a relation to crude, and with prices in the $90-100 range, shares have seen a nice boost. Or, to simplify things even more here’s an isolated look at DCP’s shares:
Sha-pow! At the same time that crude oil prices essentially went nowhere, DCP Midstream shares jumped 36%. And that’s not even accounting for the dividend. At the current price of $45 DCP Midstream is paying a 6% yield.
The key to much of DCP’s success is their exposure to the booming Eagle Ford. With more natural gas and liquids production coming from this play each day, DCP’s midstream assets are gaining in value and spinning cash.
Imagine DCP Midstream as the go-to freezer salesman in a town that produces an increasing amount of ice cream.
Looking out over the next nine months, DCP Midstream is still a great way to safely invest in stable oil prices. With $90-100 oil this NGL player will continue to spin cash.
Keep your boots muddy,
Original article posted on Daily Resource Hunter
Matt Insley is the managing editor of The Daily Resource Hunter and now the co-editor of Real Wealth Trader and Outstanding Investments. Matt is the Agora Financial in-house specialist on commodities and natural resources. He holds a degree from the University of Maryland with a double major in Business and Environmental Economics. Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department. Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.
Pingback: read this()
Notes from Jim Rickards' recent trip to Istanbul, where he met with “the Donald Trump of Turkey"... central bank officials... and others. It was a great chance for him to gather market intelligence on the world’s eighth-largest emerging market. Read on...
Rice is one of the world’s most important crops. Three billion people depend on it as a staple every day. But climate change is wreaking havoc on rice production. Stephen Petranek has more on the steps researchers are taking to protect one of the world’s most important foods.
Traders have two options in this market: speed up...or slow down. And since I hope you have a life outside of watching a computer monitor between 9:30 and 4, I suggest you put your daytrading dreams on hold for a bit and hit the brakes.
Few understand how to value gold, and even fewer understand that gold is not really an investment — it is money. Jim Rickards illustrates this point further and gives you actionable methods to accumulate wealth in gold. Read on...
With summer vacation on the horizon across the United States, kids who are carrying measles from states hard hit like California and Arizona will be mingling to with kids from other states with almost no cases. And officials are still wary about this year’s mini-epidemic. Stephen Petranek has more…