You Can Make Your Returns From Oil and Gas Really Jump

One of the toughest aspects of investing in energy involves deciding which group(s) to favor. Many of the independent producers operating solely in the U.S. onshore have done extremely well during the country's current oil and gas boom.

Apr 9, 2014 at 10:30AM

Given the ever-so-fundamental tenet that investing involves buying low and selling high, it's more than a little edifying to look at a history of companies in the energy sector.

As you know well, traditional energy can be divided into several groups, including big integrateds, independent producers, services providers, refiners, midstream companies, etc. For now, let's look at surprising comparisons in share price performances among the integrated majors and the independent producers during the past five years. Regarding the latter, we'll limit our attention to those companies that operate solely in U.S. onshore oil and gas plays.

As for the majors, shares of ExxonMobil Corporation (NYSE:XOM), the biggest of Big Oil, have risen by 40% in the past five years. That's not especially impressive when you know the Standard & Poor's 500 is up about 118% for the same period. Chevron Corporation (NYSE:CVX), the second largest U.S.-based major (and the only other fully integrated oil and gas company left in our country) has seen its shares move about 72% higher since early April of 2009. The clear message in both cases: You'd have been better off with index funds.

An attractive energy Oasis
Or, as an even better alternative, you might have scoured the landscape for successful independent producers, many of which handily topped the S&P's performance. For instance, there's Oasis Petroleum (NYSE:OAS), which, with a five-year share price growth of 168%, beat the S&P by about 42%. Perhaps more importantly, the company is still widely considered a buy.

Oasis Petroleum confines its operations to the Bakken and Three Forks plays.

Oasis was founded in 2007 by Tommy Nusz and Taylor Reid, a pair of experienced oil and gas operators. Today, the Houston-based company's operations occur exclusively in the Williston Basin of North Dakota and Montana.

Don't be overly concerned about any sort of impending slowdown in production you may have seen forecast for the Bakken and Three Forks formations -- both of which are part of the Williston. In fact, respected Wood Mackenzie, which consults worldwide on oil and gas, among other areas, forecast just last week that a boom-and-bust scenario does not appear to be in the offing for the formations. The firm expects a 2014 average daily oil production of 1.1 million barrels there to reach 1.7 million barrels per day by 2020.

Blowing past the S&P
However, if you'd rather run past the index at an even faster pace, you might spend time looking at Whiting Petroleum Corp. (NYSE:WLL). If you'd bought Whiting five years ago, you'd be smiling today over a nearly 340% share price gain, having topped the index by fully 187%. But if you think you've missed that particular high-speed train, the consensus among the analysts is that it still merits a rating slightly better than a 2.0 (buy).

Like Oasis, Whiting is a major player in the Bakken. However, befitting its Denver base, it'll also expose you to its operations in Colorado's expanding DJ Basin and in the North Ward Estes Field of the revitalized Permian Basin.

An even bigger explosion
So, Whiting's gains still aren't good enough for you? In that case, you might closely monitor -- we always recommend that Fools do careful research before pulling the "buy" trigger -- SM Energy Company (NYSE:SM). Also based in Denver, SM, which was founded more than a century ago and was previously called St. Mary Land & Exploration Company, has watched its shares explode by 365% during the past five years. Where I went to school, that was just about 210% stronger than the Standard & Poor's 500 during the same timeframe.

Like its above-discussed brethren, the company also operates in the Bakken and Three Forks. And as with Whiting, it's busy in the Permian Basin. But there's more: It's also in the prolific Eagle Ford play of South Texas. And for even more diversity, it manages assets in the Haynesville shale of Louisiana and Texas, along with the oilier (and fast-emerging) Woodford shale, which covers much of Oklahoma.

Foolish takeaway
There are, of course, other independent domestic producers that have done very nicely by their shareholders since the widespread use of hydraulic fracturing created an oil and gas boom in the U.S. But since it would be silly to assume that the best is past for this contingent, I suggest you get to know this group awfully well.

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David Smith has no position in any stocks mentioned. The Motley Fool recommends Chevron. 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.

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