Chesapeake Energy (NYSE: CHK) Stock Price
- Four Natural Gas Companies Investors Can Buy Right Now
- How to Profit from the "Shale Oil Bubble"
- 2012 Oil Price Outlook: How to Profit From $150 Oil
In fact, some of these companies are currently on the bargain rack. You just have to know where to look.
Take EOG Resources Inc. (NYSE: EOG), for instance.
Traditionally known as a natural gas producer, EOG has reinvented itself as a major oil producer.
It's still heavily involved in the natural gas market, but the company also has managed to increase its total liquid oil production by 49% to 130,000 barrels per day.
Chief Executive Officer Mark G. Papa said he expects to reach 200,000 barrels per day this year. That would make EOG the second- or third-largest oil producer in the United States.
The effects of this transformation are evident in the company's earnings.
After taking a third-quarter loss of $70.9 million in 2010, EOG reported net income of $541 million for the third quarter of 2011.
That's not all. EOG's potential for growth is outstanding, since it has huge oil shale reserves. The company is the largest oil producer in both North Dakota's Bakken Shale and the Eagle Ford Shale in South Texas.
These two shale oil fields have played a key role in ramping up U.S. oil production over the past few years. They each have an estimated 4 billion barrels of recoverable reserves.
Earlier this month, analysts from Goldman Sachs Group Inc. (NYSE: GS) raised their EOG share price target to $118, while RBC Capital Markets (NYSE: RY) analysts set their target at $119. Those targets estimates represent a 13% to 14% premium from yesterday's (Tuesday's) closing price of $104.55.
And that's just one natural gas company with a strong investment pedigree.
Here are three others...
It's true: French, Japanese, and Chinese energy companies cannot seem to get their hands on a big enough slice of U.S. shale oil deposits these days.
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However, that doesn't mean this investment frenzy is evidence of a "shale oil bubble."
Instead, it's a classic sign of an investment trend - one that will continue throughout 2012 creating an opportunity for investors to profit.
Consider that in just the past two weeks:
- French oil major Total S.A. (NYSE ADR: TOT) invested $2.3 billion in Chesapeake Energy Corp.'s (NYSE: CHK) Utica Shale operation in eastern Ohio.
- China Petroleum & Chemical Corp. (NYSE ADR: SNP), spent $2.2 billion for a 30% stake in five Devon Energy Corp. (NYSE: DVN) shale projects.
- And Japan's Marubeni Corp., a commodities trader, agreed to pay $1.3 billion for a stake in Hunt Oil Co.'s Eagle Ford shale property in Texas.
The Reality Behind the Shale Oil Bull MarketThat's a clear sign to investors that interest in shale deposits among foreign energy companies is beginning to heat up.
And to hear the mainstream media tell it, these companies are overpaying for access to U.S. shale deposits.
In fact, they claim that has led to astronomical valuations and the formation of a "shale oil bubble."
But that that perception is actually only half right: While the value of shale deposits has skyrocketed, the reality is that the higher prices are fully justified based on the increasing demands for oil and gas.
What's more, the foreign companies that are paying top dollar for access to U.S. shale assets aren't just paying for access-they're also paying for expertise.
"Foreign majors needaccess to technology andexpertise, as well as being able to putsome portion of reserves on their books," said Money Morning Global Energy Strategist and Editor of the Oil & Energy Investor Dr. Kent Moors. "For that they are quite prepared to farm in for a minority position in development projects."
In return, U.S. energy companies get the investment dollars needed to develop costly and complex reserves.
These foreign investments also give U.S. companies the money they need to acquire more land leases and increase their odds of hitting an especially productive gas or oil reservoir known as a "sweet spot."
That, Dr. Moors says, is where the "bubble" talk comes from.
"U.S. operators cannot afford to under-commit and that has led to an inflation in land prices," Moors said. "Those prices are nowrather out of proportion toa NYMEX gas price of $2.60 per 1,000 cubic feet and hugestorage volume dueto amild winter."
Still, the demand curve for gas will eventually move up as a result of increased usage in electricity generation, replacement of crude oil in petrochemicals, and a renewed emphasis on liquefied natural gas (LNG).
These energy companies, therefore, are taking a medium-term view. In short, they believe that once demand and prices begin to rise, these higher land values will be justifiable.
So where do investors fit in?...
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No, next year, the trajectory for oil prices will be far more linear - and it's pointed up.
In fact, we could even see $150 oil by mid-summer.
There are two key reasons why:
- Despite the economic crisis in Europe, oil demand proved resilient in 2011. It is poised to remain steady in 2012, and then escalate drastically for the foreseeable future.
- Supplies will once again be constrained, and the potential for political upheaval in major oil-producing nations has increased.
Indeed, Goldman Sachs Group Inc. (NYSE: GS) recently recommended that traders buy July 2012 Brent crude futures in anticipation of a rally to $120 a barrel. It was one of the bank's top six trades for 2012 published in its "Global Economics Weekly" report.
Barclays Capital agrees.
"Even in the worst case scenario, the downside to oil prices is unlikely to be anything as severe as during the 2008-2009 cycle," Barclays analysts Roxana Molina and Amrita Sen wrote in a report earlier this year. "As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions."
As for West Texas Intermediate (WTI) crude the Energy Information Administration (EIA) expects it to average nearly $94 a barrel next year.
And even that's a conservative estimate.
"Given the oil volume constriction oncoming and the continuing increase in global demand - this drives the price, not North America or Western Europe - we will reach $150or beyond by July 4," said Money Morning Global Energy Strategist Dr. Kent Moors.