3 Oil Stocks Whose Vertical Moves Pay Dividends in a Horizontal World

Horizontal drilling is all the rage, but for Pioneer Natural Resources, Oasis Petroleum Inc., and EOG Resources, Inc., it’s the vertical moves that really pay dividends.

Jan 15, 2014 at 11:00AM
Vertical Vs Horizontal

Source: Pioneer Natural Resources investor presentation. 

Hydraulic fracturing gets most of the credit and too much of the press for unlocking our massive shale oil and gas reserves. Few realize that we've been fracking for more than 60 years. Even fewer know that what really changed the game in America was combining fracking with horizontal drilling.

Because of this, energy companies live in a horizontal world. However, some of the best investments these companies are making today are vertical moves. I'm not talking about drilling, either. The companies that are among the best in the business are those that are pursuing vertical integration to save money and fuel profits for investors.

Serving up savings and profits
Oil-field service giants like Baker Hughes Incorporated (NYSE:BHI) make billions each year by assisting oil and gas producers in drilling efforts. However, by cutting out this middleman, oil and gas companies like Pioneer Natural Resources (NYSE:PXD) and Oasis Petroleum (NYSE:OAS) have found an important way to cut costs, which enables these companies to keep more profits for investors.

Pioneer Natural Resources began its vertical push in 2009 when it acquired an oil-field service pumping division in Colorado. It has since built up that division into the 13th-largest service company in America in terms of horsepower. The company uses that power to keep its well costs in check. It then invests some of the savings in science so that it can better develop its massive resource base in Texas.

We find a similar story in the Bakken Shale, where Oasis Petroleum has quietly invested to build its own service business. The company can save about $500,000 per well by using its in house Oasis Well Services business. Because of this savings, as well as transitioning to pad drilling and other efficiencies, Oasis Petroleum has been able to drop its well costs from $10.5 million in 2012 to a target of $7.3 million in 2014. Bottom line, by vertically integrating and building an oil-field service company both Pioneer Natural Resource and Oasis Petroleum are able to keep costs down by cutting out middlemen like Baker Hughes, which is increasing profits.

Oasis Petroleum Ows

Photo credit: Oasis Petroleum investor presentation (link opens a PDF).

Packing sand
Oil-field services are just part of the vertical integration efforts for U.S. producers. Another step some companies are making is to invest in a frack sand mine. Both Pioneer Natural Resources and EOG Resources (NYSE:EOG) have company-owned frack sand mines. In some regards, this is cutting out two middlemen as oil-field service companies like Baker Hughes typically contract frack sand volumes from sand mine owners and then sell the sand as part of a drilling package.

Last year, Pioneer Natural Resources purchased one of the largest industrial sand mines in the U.S. for $297 million. Not only does that secure Pioneer's supply of sand, but it helped to lock in its costs. Last year, proppant suppliers were one of the surprising winners in the stock market as surging demand from an increase in proppant volume per well spurred growth.

Pioneer Natural Resources Sand

Photo credit: Pioneer Natural Resources investor presentation. 

EOG Resources also sources its frack sand from company-owned mines. Like Pioneer, it has invested several hundred million dollars to lock up its supply. However, these mines are saving the company about half a million dollars per well. That really adds up for a company drilling more than 600 wells each year.

Railing profits
One of the reasons EOG Resources purchased a frack sand mine was because it had already begun to invest in rail infrastructure to ship its oil out of places like the Bakken Shale. It was an early mover in the crude-by-rail phenomenon. Unlike a lot of its peers, EOG owns the rail loading and unloading infrastructure to get its oil out of producing regions and into premium priced markets. Because it doesn't rely on a third-party provider, the company can keep more of the profits.

Last year, alone EOG Resources was able to earn an $8.19-per-barrel premium for its oil over the U.S. benchmark WTI. That's in addition to the cost savings from self-sourcing frack sand. These two factors have enabled EOG Resources to turn its drilling rigs into money-printing presses.

Investor takeaway
The move to horizontal drilling changed the game in America as it enabled companies like Pioneer Natural Resources, Oasis Petroleum, and EOG Resources to get oil and gas out of tight shale formation. However, the next phase of that game change came as all three pursued vertical integration efforts.

Our top stock for 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information