America will become the largest oil producer in the world by the end of the decade.
Thanks to new applications of hydraulic fracturing and horizontal drilling, the rush is on to unlock the country's 48 billion barrels of shale reserves. It should be no surprise, therefore, that an opportunity this big has attracted the attention of smart money investors.
Over the past several quarters, billionaire hedge fund manager John Paulson has been steadily increasing his position in several American energy producers. Which names is he buying? Let's take a look.
Pioneer Natural Resources
Pioneer Natural Resources (NYSE: PXD ) is one of the country's largest independent oil and gas companies and has been a Paulson favorite for many years. It has been on the front lines of America's energy boom with a great set of assets in the Eagle Ford and Barnett shales in Texas.
But what makes Pioneer truly exciting is its position in the West Texas Spraberry/Wolfcamp play. Early estimates show this small, oil-rich region could contain 50 billion barrels of recoverable oil. In some parts of the field the pay zone is up to 3,500 feet thick -- that's like having six Eagle Fords or eight Bakkens stacked on top of one another. If these estimates are accurate, that would make the Wolfcamp the biggest oil field in the country and the second-largest in the world.
Pioneer has reported some incredible drilling results out the Wolfcamp in recent months. Many of the company's new wells produce more than 1,400 barrels of oil equivalent per day during the first few days of operation. To put this in perspective, a new well is considered to be a true gusher if it hits the 1,000 barrels per day milestone. Wolfcamp wells are remarkable.
According to the latest 13F filings to the SEC, Paulson's hedge fund acquired a 10 million share position in Whiting Petroleum (NYSE: WLL ) last quarter, increasing his position by more than tenfold. This brings Paulson's total stake in the company to slightly more than $640 million.
Two factors may have attracted his attention. First, the company has posted some truly incredible results out of the North Dakota Bakken. Over the past four years, Whiting has grown its production out of the Wiliston Basin by almost threefold to 63,500 BOE/D.
Second, Whiting may be sitting on America's next big shale play. The company owns about 123,000 net acres the Colorado Niobrara. While the field has been known to geologists for almost a century, it has only been through the application of hydraulic fracturing and other new techniques that the energy industry has been able to unlock the Niobrara's bounty.
Drilling economics also compare favorably to the Bakken. According to figures provided by Whiting, the average well in the Niobrara costs roughly $7 million to $8 million to complete, and CEO James Volker claims the company is generating a 100% return on every well it drills in the region.
Oasis Petroleum (NYSE: OAS ) is posting some incredible numbers. The company in 2013 grew its average daily production 51% year over year to 33,904 barrels of oil equivalent per day, up from 22,469 BOE/D in 2012. Oasis also increased total estimated net proved oil and natural gas reserves to 227.9 million barrels of oil equivalent, up 59% year over year.
While those figures are impressive, more of that revenue is starting to trickle down to the bottom line. In the past year Oasis has reduced its average well completion costs by 12% to $7.9 million per well. Thanks to the transition to pad drilling, hydraulic fracturing, and other operational efficiencies, management expects to shave another $400,000 off that figure by the end of 2014.
All of this translates into big cost savings for Oasis. When you multiply that $400,000 figure across the 106 net wells the company expects to drill this year, Oasis will pocket an additional $42.4 million in 2014. It's still a long way from closing the company's funding gap, but savings will still have a big impact on free cash flow.
It never hurts to peek over the shoulder of the world's greatest investors. The fact that a legendary investor like John Paulson is betting heavily on America's energy revolution certainly gives the development a lot of credibly. This is an industry every investor should have on his or her watchlist.
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