It has been a long time since California has seen a profit opportunity like this.
The state's Monterey Shale formation may hold as much as 500 billion barrels of oil making it more valuable than the gold rush of 1848.
With oil prices expected to hit $150, if not $200, a barrel this year that means the profit potential is limitless.
After all, peak oil isn't a myth – it's a reality.
Traditional oil production is plateauing, while demand in emerging markets continues to rapidly increase.
Meanwhile, turmoil in the Middle East has threatened supplies even further. And the war with Iraq didn't end up being the energy bonanza many thought it would.
And now the Arab Spring and tensions in Iran have escalated to the extent that military intervention there seems to be a foregone conclusion.
That's why the Monterey Shale – a rib-shaped formation that extends from Northern California down through the Los Angeles area and then offshore to outlying islands – is getting so much attention.
And unlike other shale plays in the United States, the Monterey is primarily oil, not gas.
That means Monterey shale does not require hydraulic fracturing, which has come under fire from environmentalists.
It also means companies can extract much of the oil using simple vertical wells, rather than the more expensive horizontal drilling needed for shale gas plays. Some horizontal drilling will be used, but it is not required in all fields, greatly reducing operating expenses.
In fact, in large parts of the formation, production costs are less than $10 a barrel.
Think about what that means for profit margins with crude prices currently near $110 a barrel.
So how can investors profit?
How to Play the Monterey Shale
A lot of investors have been sucked into Venoco Inc. (NYSE: VQ) – a small producer already extracting from the offshore South Ellwood fields in the Monterey.
The company is currently working at 22 deposits and has begun a large-scale development project. Venoco has 300,000 acres under lease and an excess of 10 billion barrels available for extraction at its current sites.
But there's a problem here.
Venoco chairman and CEO Timothy Marquez has offered to buy out the remaining shares he or his interests do not control (they currently own 50.3%). Marquez has offered $12.50 a share, a 63% premium to market value when the offer was made and still almost $2.00 higher than the present price.
That means there's a very real possibility that VQ will be going private and not be available to invest in.
Furthermore, while the VQ board unanimously approved the deal, shareholders have been more reticent. And now there have been several major lawsuits introduced representing minority shareholders upset with the move, threatening to delay or even block the deal.
And as if that weren't bad enough, Standard & Poor's recently downgraded Venoco debt after quarterly results that showed improved revenue but declining profitsfrom ongoing fields.
The bottom line: Venoco is no longer a viable move for investors.
Occidental Petroleum (OXY): Tops in the Monterey Shale
However, global energy expert Dr. Kent Moors says there's another company poised to reap big profits from the Monterey Shale.
"The main company in the rush to the Monterey will be a larger dominant regional producer – Los Angeles-based Occidental Petroleum Corp. (NYSE: OXY)," says Dr. Moors.
OXY now controls more leased acreage in the Monterey – 1.2 million acres – than virtually all other companies combined. And it has big plans for all that land.
OXY will spend $6.3 billion to develop the acreage over the next four years, anticipating that 25% of its California production (about 56,000 barrels per day) will come from the shale by 2015, Moors said citing internal company estimates.
Occidental had a strong finish in 2011, with year-over-year profit rising nearly 35% in the fourth quarter, and by almost 50% for all of 2011. Additionally, OXY raised its dividend for the 10th straight year.
The stock now yields more than 2% and is currently up 26% over the past six months.
With this kind of performance Occidental – the fourth-largest U.S. oil company – isn't about to sneak up on anybody.
But the Monterey Shale is…. so don't miss your chance invest in the biggest thing to hit California since the gold rush.
(Editor's Note: : In a recent report written specifically for energy investors, Dr. Moors has uncovered opportunities that are even more lucrative than the Monterey shale. You can get a copy of that free report by clicking here.)
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