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This Devon Energy acquisition argues for owning Cheniere and Chesapeake in U.S. shale boom

posted on November 25, 2013 at 7:46 pm

The deal that Devon Energy (DVN) announced on Wednesday, November 20, isn’t a bad deal, but I think it’s big value for investors is what it says about where the profits are or aren’t in the U.S. natural gas and oil from shale boom.

Since 2009 Devon has transformed itself from an oil producer with a big presence in deep water and international discoveries into a producer with a major onshore natural gas and oil shale position in the United States and Canada through $9 billion in asset sales—and through acquisitions like that it announced last week. The company will acquire privately held GeoSouthern Energy for $6 billion in cash. GeoSouthern’s assets include 82,000 net acres in the very hot Eagle Ford geology. Those acres produce 53,000 barrels of oil equivalent a day and contain an estimated 400 million barrels of oil equivalent in recoverable reserves.

In terms of rounding out Devon’s production profile this is a smart deal—Devon has acquired low risk drilling opportunities—an inventory of about 6 years of drilling inventory—that, according to company projections will show a 25% compound annual production growth rate through 2017.

But the take away lesson here for investors is how efficient the market has become at pricing in acquisitions in the U.S. natural gas and oil shale boom. Credit Suisse calculated on November 21, the day after the deal was reported, that the acquisition would add about $3 a share to Devon’s market value. By the close on November 22, Devon’s shares had tacked on $2.78 from the November 18 closing price.

In other words the market had priced in the deal, according to Credit Suisse’s calculations at least, within days of its public announcement.

This doesn’t mean that the Devon acquisition doesn’t make solid sense or that Devon isn’t a good stock—Credit Suisse calculated a one-year target price of $77 a share.

It does say that the U.S. natural gas and shale boom isn’t undiscovered territory anymore. Read more

The oil world turned upside down–and how to invest in the rise of the U.S. to top global producer by 2017

posted on November 20, 2012 at 8:30 am
Oil rigs - land

Five years ago I never imagined I’d type these words.

By 2017 the United States will overtake Saudi Arabia as the world’s largest oil producer.

In addition, according to the International Energy Agency, by 2015 the United States will overtake Russia to become the world’s largest natural gas producer.

The United States is now the fastest-growing oil and natural gas producer in the world. During the last five years, according to Citigroup, the United States has added 2.59 million barrels a day to total production.

You’d think there’s an investable angle there somewhere.

I can think of two. No make that three.

First, there are the stocks of the companies that are responsible for this huge surge in U.S. production.

Second, there are the stocks of the companies that will make money from solving the current bottleneck in getting this supply to market.

Third, there are the sectors in the U.S. economy that will reap benefits from lower U.S. energy prices beyond the general advantage flowing to the U.S. economy from lower energy costs.

Let me start with the general picture and then move to individual sectors and trends. Read more

ExxonMobil buys U.S. natural gas for $31 billion–I told you this was a big trend

posted on December 14, 2009 at 1:53 pm

ExxonMobil (XOM) will buy XTO Energy (XTO) for $31 billion in stock. (ExxonMobil will also assume $10 billion in XTO Energy debt.)

This acquisition is just the latest example of a shift among the international energy majors from exploration and development for oil in risky new geologies and tough climates to a concentration on predictable, low-production cost assets such as onshore U.S. reserves of natural gas locked up in shale formations such as the Barnett shale formation of Texas.

I flagged that trend for you in two posts earlier this month. You’ll find links to those columns later in this post. Read more

The return of the oil shortage–around 2015–and why the industry’s logical decisions now will make it worse

posted on December 8, 2009 at 8:30 am

Devonshire Energy’s decision to sell its expensive to develop deepwater assets in the Gulf of Mexico in order to concentrate on its onshore natural gas reserves makes perfect sense.

For that company.

For the oil industry and for the global economy picture, though, could make the predicted energy crisis of 2015 or so much worse.

In the short-term, there’s plenty of oil. The slowdown in the global economy and the addition of new supplies from countries such as Angola assures that. OPEC (Organization of Petroleum Exporting Countries) has a sizable surplus of production capacity.

In the long-term the story is very, very different. In the long-term, say 2030, oil could be in serious shortage again. And I think the likely effects of that shortage now 20 years off will be felt much sooner thanks to perfectly reasonable decisions by individual oil companies to maximize their profits. Maybe as soon as 2015.

If you are a genuinely long-term investor I’ve got a three stocks to suggest at the end of this post for how to profit from what is admittedly a very distant trend. Even if you’re not interested in putting money to work on prospects that are so far away, I think knowing about this trend will give you potentially profitable context for all your investments. Read more

Sell ExxonMobil (XOM)

posted on September 16, 2009 at 1:30 pm

When I added ExxonMobil (XOM) to Jubak’s Picks on December 23, 2008, I thought it was a reasonable way to balance risk and reward. The stock was a good way to reach for some upside return in case the global economy—and oil prices—rebounded more quickly than I expected in 2009, while at the same time using ExxonMobil’s dividend to give me some protection against the risk that oil prices would tumble further.

For much of 2009 the stock lagged the market but I was content to collect my dividend while waiting for shares to get moving.

But recently ExxonMobil has also started to lag the rest of the energy sector. For example, the gain on ExxonMobil since my December 23 purchase until September 16 is a loss of 7.18% (excluding dividends). Devon Energy (DVN), a stock without the downside protection of an ExxonMobil, is up 14% in that period. Almost all of Devon Energy’s outperformance has come since August 1. Read more

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