Fundamentally, my view is that world oil demand will gradually gain positive traction over the next 24 months as the global economic recovery slowly continues. I am also of the view that under-investment and depletion in the world's aging oil fields (~80% of world output) will increasingly take its toll on world supply. With that being said, investors who are looking for exposure to oil might want to consider an E&P (exploration and production) company. I believe that any one of these three picks are a suitable fit.
High growth & resource potential
Investors need to recognize the fact that Cabot Oil & Gas (NYSE: COG ) is the best dry gas producer in the US today. It is highly likely that the company can continue its hyper-growth in the Marcellus Shale for years to come as the company recently revealed it would add a sixth rig to the play and could add a seventh rig by early 2014. The bulk of the company's 200,000 net acres lies in Susquehanna County, PA, which without question offers the highest quality rocks in the play.
Investors can also expect numerous infrastructure expansions over the coming years, giving investors added assurance of its growth. Because of its low cost, Marcellus gas can be further exported to the US northeast growth markets, which are hungry for natural gas to feed electric power needs. In addition, Marcellus natural gas can make its way into all US producing markets - e.g., Southwest, Midwest, even Canada - for many years to come. In fact, the Marcellus Shale's future could involve lighting homes in Tokyo.
Higher risk, high-growth possibilities
Anadarko Petroleum (NYSE: APC ) can offer investors a high-growth possibility from its US onshore oil plays such as Wattenberg and Eagle Ford. Collectively, these two programs generated more than 90,000 net barrels per day of liquid sales volume in the recent quarter, an increase from 63,000 barrels per day in the same quarter 2012. The company will continue to accelerate activity in these programs for 2014 and beyond.
Investors should also take confidence in the fact that the company has an impressive international exploration track record. For example, in Mozambique it made the largest natural gas find in the world in the past decade as the exploration area holds anywhere from 17 trillion to 30 trillion cubic feet (tcf) of recoverable reserves from 30 to 50 tcf reserves in place. Big discoveries like this allow it to secure future production as the company plans to produce its first cargo in 2018. According to Bloomberg, there is enough fuel to build the world's second largest liquefied natural gas plant. The company also has international operations in Brazil, China, New Zealand, Indonesia and many other countries.
Finally, it is important to mention the company has a contingent liability - i.e. the Tronox lawsuit - which may be resolved soon. If the company receives a favorable ruling it can give shares a boost in the short term.
Nothing fancy anymore: slow, predictable growth
Apache's (NYSE: APA ) high level of drilling in its liquids-rich Permian and Mid-Continent plays should help the company achieve solid, predictable production growth in high-margin crude oil. The company is operating 90 rigs (up from about 25 rigs two years ago), is the second most active driller in the US and is the largest leaseholder in the oil-rich Permian basin.
Within the past year the company has shifted from an "acquire and exploit" strategy to a "drilling machine" strategy. The company plans to divest $4 billion in assets by year-end 2013 as part of the plan. Thus, the company recently announced a restructuring plan that includes divestitures such as the Gulf of Mexico Shelf sale for $3.75 billion, JVs and share repurchases.
A new, predictable era has arrived at Apache. The company has realized that assets such as the Gulf of Mexico come with high regulatory overhead and cannot compete with the lower-priced gas production domestically the company has invested in over the past year. Management sees onshore unconventional plays as a new priority in delivering shareholder value over time, which could result in a predictable, steady growth instead of the volatility investors have seen in share prices over the years.
Investing in any oil company is always subject to outside factors and should only be added to a diversified portfolio. Global economics, regional conflicts, and even speculative high frequency trading can all change the behavior of the oil market in a heartbeat.
That being said, I believe the three companies I have profiled come with different risk factors. Apache might be the "safest" play given a renewed focus and strategy while investors will be expecting Anadarko Petroleum to continue discovering large international reserves which yield high returns but comes with high risk. Cabot Oil is a great choice for investors that want somewhat of a middle-ground between playing it safe and playing it risky as the company can present a high growth story with already proven assets.
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