What Investors Need to Know About the U.S. Oil and Gas Industry

It's no surprise that over the past 24 months, the U.S. energy sector underperformed the broader equity markets by quite a margin.

The past two years saw the supermajor oil companies struggle with declining production volumes. Additionally, higher crude oil prices in 2011 meant refiners were acquiring feedstock at a higher cost, which eroded their margins. Finally, a slump in domestic natural gas prices last year cut into producers' profits badly.

Not very impressive
To get an industry perspective, the exchange-traded fund Energy Select Sector SPDR, which tracks the U.S. oil, gas and consumable fuels, and energy equipment and services industries, underperformed the S&P 500 by more than 17 percentage points since June 2011. A combination of volatile crude oil prices, as well as a demand-supply mismatch for natural gas, contributed to this lackluster performance.

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So where is this leading to? Will the U.S. energy sector continue to underperform? Or will we witness a breakthrough in this industry?

Unimpressive so far?
Apparently, the unconventional oil- and gas-producing regions haven't been too impressive. Thanks to technological challenges coupled with high extraction costs, producers haven't really been able to add value or see a decent return on investment thus far. Additionally, natural gas prices remained depressed -- even below extraction costs for some producers -- over the past two years. Simply put, the general pessimism regarding the overall energy sector seems to be hanging heavy in the markets.

However, that is also where discerning investors see opportunity. Unfortunately, this also comes with a rider: We are looking at a long-term perspective here.

It's bigger than it looks like
The shale revolution is actually bigger than what most people have realized. What many have failed to understand is that energy investments are really long-term in nature. Most of these investments span decades. When it comes to shale oil and gas properties, we are still in the initial stages of development. Michael Yeager, who heads the petroleum division of BHP Billiton (NYSE: BHP  ) , aptly sums it up: "Every time we look at the opportunities in our shale oil and gas plays, they get larger."

For the record, BHP Billiton holds the second largest position in the Eagle Ford shale play behind leader EOG Resources (NYSE: EOG  ) . Along with ConocoPhillips (NYSE: COP  ) , these three companies hold acreage in the Eagle Ford whose combined worth is an astounding $30 billion.

EOG Resources holds 639,000 net acres in the Eagle Ford, with 569,000 of those in the crude oil window. BHP Billiton, through its $12 billion acquisition of Petrohawk, holds 341,000 net acres in the Eagle Ford and a total of 1.6 million acres in U.S. onshore shale properties. ConocoPhillips, on the other hand, holds 227,000 net acres in the Eagle Ford and a total of 2.5 million net acres in unconventional resource plays across the Lower 48.

What's evident is that even while taking a single unconventional resource play (in this case the Eagle Ford) into perspective, eventual development will take years. According to the Energy Information Administration's latest report (link opens a PDF), the Eagle Ford is estimated to be hold a staggering 13.6 billion barrels of risked, technically recoverable shale oil in remaining reserves and undeveloped resources. Obviously, this also includes unproved reserves. This year alone, capital expenditures are estimated to hit $28 billion in the Eagle Ford, according to energy consulting firm Wood Mackenzie.

The muscles behind the brains
Who helps in developing these resources? This is where the technological expertise of oilfield-services companies is required. And the best among them are Halliburton (NYSE: HAL  ) and Cameron International (NYSE: CAM  ) . Halliburton's well-construction and drilling teams seem to have a definite edge over other players in the industry. The services extend from well-bore evaluation to well-completion methods. The entire gamut of services is on offer. Cameron's well-surface equipment, as well as services for high-pressure, high-fluid volume fracturing, flowback operations and well testing, are industry standards.

Foolish thoughts
It would be downright silly to look at energy investments from a short-term perspective. By "short term," I mean anything less than three years. Discerning energy investors have a lot more to gain by focusing their investments over the next 10 years.

Domestic oil and gas service companies have taken a hit in the recent past because of a slowdown in the natural gas drilling boom of the past couple of years. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2013, at 12:30 AM, greenknight32 wrote:

    The problem with shale oil and gas is that it's expensive energy - much more costly to extract than conventional oil and gas. The prices producers have to get to make a profit are high enough to create a strong incentive to use less. The technology to use petroleum much more efficiently is getting less expensive all the time. Alternative energy is also getting cheaper, and electricity storage tech is advancing rapidly. None of this bodes well for the long-term prospects of the oil and gas industries.

  • Report this Comment On June 16, 2013, at 1:17 AM, kthor wrote:

    so much nat gas being wasted to extract oil ...

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