Shale Oil Will Soon Make the US #1 Oil Producer

 "We don't make anything anymore" is a common lament heard in the US these days. One thing we do produce is energy. New production technology opened up an ocean of shale gas. So, it's hardly a surprise that US energy production rivals Russia as #1 in the world. What may surprise some is the fact that the US is now projected to surpass Saudi Arabia as the #1 oil producer in 2013, thanks to these very same advances.

The US Energy Information Administration is charged with educating the public on all things energy-related. It tracks virtually every aspect of energy production and consumption internationally. According to the EIA, the US surpassed all other hydrocarbon producers in total output in 2012. In fact, it's been a close race between Russia and the US for the last half decade.

The shale gas boom was largely responsible for this shift. Yet, a secondary energy boom is now just beginning, led by companies like Continental Resources, Pioneer Natural Resources (NYSE: PXD  ) and EOG Resources (NYSE: EOG  ) that are pressing forward into liquids-rich shale using the same unconventional strategies. This lesswidely acknowledged boom is poised to make the US the #1 global liquids producer.

The Three Horsemen
Returns from the three have been impressive. Continental, the laggard of the group returned 113% for shareholders over the last two years. Pioneer provided 181% returns. Rapidly growing production from two new US basins is driving these gains. The very same directional drilling and hydraulic fracturing techniques that made gas shale work now make the Bakken and Eagle Ford work.

  Oct. 7, 2011 Oct. 8, 2013 Dividend Total Return
CLR $49.88 $106.29 $0.00 113%
PXD $68.45 $192.05 $0.16 181%
EOG $74.90 $171.46 $1.376 131%

The Bakken sets the table
Continental was an early entry into the lucrative Bakken following its 2007 IPO. It's the largest leaseholder in the Bakken with 2012 production of 67.5 MBOEd (thousand barrels of oil equivalent per day). Bakken production growth has been a huge part of the production surge in the Lower 48. While North Dakota Bakken production topped 1 million barrels of oil per month for the first time in December of 2007, current monthly production now exceeds 25 million barrels.

Bakken success bred copycats
With an eye on the Bakken's performance, everyone scouted for similar opportunities. Operating under the radar, EOG surprised many by announcing its acquisition of 595,000 Eagle Ford acres in 2010. By the end of 2012, its Eagle Ford production hit 106 MBOEd with 75% of that liquids. EOG's Eagle Ford success is hardly unique. Total industry oil production from the basin reached 607 MBbld (thousand barrels per day) in the first half of 2013 off a base of just 15 MBbld in 2010.

New life for the oldest of basins
Given this success, it's no wonder that everyone's hunting for the next hot unconventional play. Surprisingly, the venerable Permian may be next. Pioneer had big success in the Eagle Ford but seems even more optimistic about the Permian. The company estimates unconventional Permian resources at 50 billion barrels of recoverable resources, making it the largest oil opportunity in the country.

Permian drilling permits issued by the Texas Railroad Commission rose 180% from 2009 to 2012 and the basin's depleting production profile has reversed trend. The Permian produced 312 million barrels of oil in 2012, up 20% from 2009 levels. Total production actually rivals the Bakken now. Considering that much of that production is still conventional, unlocking its unconventional potential could rejuvenate the basin just as it did the Williston.

All dressed up with nowhere to go
All this new oil needs to go somewhere. There are takeaway challenges in old and new basins alike when production ramps this quickly. It's certainly the case in the Permian where several companies have anecdotally cited problems. Magellan Midstream Partners (NYSE: MMP  ) reversed its Longhorn pipeline to carry crude out. It's also pairing up with the region's largest producer, Occidental Petroleum, to build the new BridgeTex pipeline. If Pioneer and Apache are correct, unconventional Permian development is just beginning. That means even more demand for infrastructure improvements down the road.

Re-routing all that crude
Interestingly, this burst of production comes as we trim our own consumption. US consumption is down to 18.7 million barrels per day from its 2005 highs of 20.8 million. With flagging demand and increasing production, the EIA anticipates net US imports to falling to 5 million barrels per day in 2014. For reference, net US imports were 9 million barrels per day just 2 years ago.

These changes are expected to shift the import-export patterns in the US and abroad. Enterprise Products Partners LP (NYSE: EPD  ) believes that Gulf coast imports will drop to 600 thousand barrels per day from their current 4.7 million barrel level by 2020. East coast imports are projected to dry to a trickle.

At the same time, Gulf coast refined product exports are projected to increase 60% to 4.2 million barrels per day, positioning the Gulf coast as the principle hub of US import-export. The company expects to benefit from its strong Texas footprint as this influx of Bakken, Eagle Ford, and Canadian production runs through the Gulf coast refining and shipping capacity.

Kinder Morgan Energy Partners  (NYSE: KMP  ) is similarly maneuvering to exploit new production trends. It will reverse its Cochin pipeline from Illinois to Alberta. An Eagle Ford-fed pipeline will supply condensate to Houston with its Explorer pipeline then carrying it north to link up with Cochin.

Condensate is critical as a diluent for Canadian bitumen that feeds Kinder-Morgan's Trans Mountain pipeline. The Cochin project strategically gives Kinder Morgan two bites at the Canadian Oil Sands apple. It's making cash bringing condensate in and diluted bitumen out.

There's more than one way to play this production trend
Domestic oil producers produced some excellent returns as unconventional oil shale production sprang to life. Finding the next big play may generate huge returns, but don't discount the midstream opportunities that this production boom creates. It's easier to see further down the road in this segment. Finding the midstream players that are positioning themselves to take full advantage of new production trends could pay big dividends down the road.

America's Energy Revolution
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 


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