2 Stocks to Play Continued Growth in U.S. Crude Oil Production

The growth in U.S. crude oil production continues to impress, recently reaching a 28-year high. According to data from the U.S. Energy Information Administration, U.S. crude oil output climbed by 78,000 barrels a day to 8.428 million for the week ended May 9, the highest level of output since October 1986. Let's take a closer look at the forces driving this rapid growth in U.S. oil production and two stocks to play the trend.

Photo credit: Flickr/Robert Ashworth.

Key drivers of U.S. oil production growth
The continued strong growth in domestic crude oil production is due largely to the combination of horizontal drilling and hydraulic fracturing, or fracking, which has allowed energy producers to tap vast oil deposits buried in deep underground shale formations. Continued improvements in these drilling technologies and high oil prices have also played an important role.

Looking ahead, the EIA forecasts crude oil production to average 8.46 million barrels per day this year and 9.24 million barrels per day in 2015, as compared with 7.45 million barrels per day last year. If the projection pans out, 2015 would mark the highest level of output since 1972 and only 400,000 barrels per day short of the all-time record annual production of 9.64 million barrels per day achieved in 1970.

In addition to growing production from shale formations such as North Dakota's Bakken and Texas' Eagle Ford, output growth will be supported by greater offshore production from the Gulf of Mexico. The EIA projects that Gulf of Mexico production will rise by 150,000 barrels per day this year and by an additional 240,000 barrels in 2015, reversing four consecutive years of declining output in the region.

Companies including Chevron (NYSE: CVX  ) , Hess (NYSE: HES  ) , and Anadarko (NYSE: APC  ) are investing heavily in the deepwater Gulf. Chevron plans to start up three major projects this year, including Jack/St. Malo, Big Foot, and Hess-operated Tubular Bells. Combined, these three projects will boost the company's net production by more than 150,000 barrels of oil equivalent per day, or boe/d, when operating at full capacity.

Meanwhile, Anadarko expects to start up its Lucius project in the second quarter of this year. The project, which is being developed using a massive 23,000-ton floating production facility called a truss spar, will have a maximum production capacity of 80,000 boe/d. Anadarko also plans to launch another 80,000-barrel-per-day project, called Heidelberg, in 2016 and views the deepwater Gulf as a crucial driver of its production growth, in addition to its onshore U.S. assets in Colorado and Texas.

How to invest in continued U.S. oil production growth
There are numerous options for investors looking to cash in on continued growth in U.S. crude oil production, including shale-focused exploration and production companies, midstream energy companies structured as master limited partnerships, and refiners.

While there are plenty of opportunities in all three of these subsectors -- upstream, midstream, and downstream -- I'd recommend taking a closer look at two U.S. shale-focused upstream producers that I believe have significant long-term upside: Apache (NYSE: APA  ) and Devon Energy (NYSE: DVN  ) .

Houston-based Apache is an independent E&P focused primarily on West Texas' Permian Basin and Oklahoma's Greater Anadarko Basin. The company has shed over $8 billion worth of assets over the past year to focus on its liquids-rich U.S. assets, which feature more attractive rates of return and more predictable production growth.

Yet despite Apache's expanding presence in U.S. liquids-rich plays, it has one of the most depressed valuations in the industry. Shares currently trade at just around 12 times forward earnings and barely above the company's book value, representing a massive discount to its peer group. As Apache ramps up production from its U.S. onshore assets over the next few years, multiple expansions could push its share price to as high as $110 per share.

Similarly, Oklahoma City-based Devon is an independent E&P focused primarily on West Texas' Permian Basin and south Texas' Eagle Ford shale, though it also maintains sizable stakes in the Woodford-Cana trend and Canada's oil sands, as well as various natural gas plays. The company has one of the most robust balance sheets in the entire industry and is poised to deliver double-digit oil production growth this year.

As with Apache, the markets don't seem to be giving enough credit to Devon's expanding presence in U.S. liquids-rich plays. Shares currently trade at around 10.5 times forward earnings, while the company's E&P business commands an EV/EBITDA multiple of just around 4. As Devon plows more money into its Eagle Ford and Permian Basin drilling programs over the next few years, margins, earnings and cash flows should rise significantly, leading to multiple expansion that could push its share price to as high as $90 a share.

Will this stock be your next multibagger?
While both Apache and Devon look meaningfully undervalued right now, 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.


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