What's the Best Way to Play the World's Largest Shale Gas Boom?

China's growing economy is producing an insatiable energy demand that the nation is scrambling to fill. The world's most populace nation (and world's second largest economy) recently signed a 30-year, $400 billion deal with Russia to supply it with natural gas, but China isn't a gas-poor nation. According to the Energy Information Administration China is sitting on 1,115 trillion cubic feet of shale gas, 68% more than the US.

Until now several factors have stymied production of these enormous reserves, mainly a lack of three things: technology, infrastructure, and water.

However, China's government is now ready to get serious about increasing its domestic gas production and has set a goal of 6.5 billion cubic meters of production in 2015 and 60 billion to 100 billion cubic meters by 2020 (US production in 2013 was 272 billion cubic meters).

To achieve this goal China Petroleum and Chemical Company, aka Sinopec, is partnering with Total in order to drill its Fuling shale assets with the goal of hitting 10 billion cubic meters of gas production by 2017.

Sinopec recently announced a $50 million joint venture with the deeply troubled oil services company Weatherford International (NYSE: WFT  ) , in an effort to gain technological expertise that could help them unlock their rich gas reserves.

In a previous article on Argentina's coming shale gas boom, I explained why the best way to invest in foreign shale resources was through oil services companies such as Schlumberger (NYSE: SLB  ) and Baker Hughes. In this case as well I would advise investors to choose oil service companies as the best way to play China's gas boom but avoid Weatherford International and instead go with Schlumberger or Halliburton (NYSE: HAL  ) .

The reasons to choose Schlumberger or Halliburton over Weatherford is one of scale and technological superiority. The fact is that, despite its recent joint venture with Sinopec, Weatherford is simply outclassed by its rivals when it comes to being established in China.

For example, Schlumberger opened the China Petroleum institute in 2012 and a reservoir lab in Chengdu in 2013. Schlumberger also has a joint venture with Chinese utility Huadian and purchased a 20.1% stake in a Chinese oil services company, Anton Oilfield Services Group, for $80 million. Meanwhile Halliburton, who has been working in China on conventional drilling for 30 years and shale drilling since 2011, is in a strategic relationship with China's SBT Energy.

Besides existing relationships, investors must consider technological superiority when choosing oil service companies. This is especially important because in the last decade oil companies have increased E&P (exploration and production) budgets by 400%, up to $650 billion in 2013, with just a 15% increase in oil production to show for it.

This is causing oil companies to search for the most cost effective methods of drilling and this is especially true in China where difficult geology means it costs two to five times more per well to drill. To give you an idea of how difficult Chinese shale drilling can be, some wells cost $12 million to frack and require 13 million gallons of water.

This is where technological innovation and vertical integration come into play. Companies such as Schlumberger and Halliburton, due to their enormous size, are able to acquire and assimilate competitors and their technology. This allows them to create a one-stop shop where foreign oil giants like Petrochina and Sinopec can come to for all their drilling needs.

Schlumberger in particular is the master of vertical integration (and my favorite oil service company) with a penchant for deals both big ($11 billion acquisition of Smith International) and small (such as Nova Drill).

With increased patent filings over the last six years and new products such as the powerdrive (improved steering of rotary drill bits during horizontal drilling), I believe Schlumberger is best poised to take advantage of China's coming gas boom.

Foolish bottom line
Though some investors may look at Weatherford International's recent joint venture with Sinopec as a major win, I view the $50 million deal as too little too late to save the investment thesis of a very troubled oil services company. Rather, I would advise investing in Halliburton or Schlumberger as the best means of partaking in the rich bounty of the world's largest shale gas reserves. Both companies (but Schlumberger most of all) have the long-standing relationships, financial resources, and technological prowess to help Chinese oil companies achieve their ambitious goals. Long-term investors seeking to grow rich from the largest gas boom in history should look to these companies as the best way to ride the gravy boat all the way to the bank -- atop an ocean of natural gas.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3013423, ~/Articles/ArticleHandler.aspx, 8/27/2015 8:21:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Adam Galas

Adam Galas is an energy writer for The Motley Fool and a retired Army Medical Services Officer. After serving his country in the global war on terror, he has come home to serve investors by teaching them how to invest better in order to achieve their financial dreams.

Today's Market

updated Moments ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:00 PM
HAL $38.04 Up +3.61 +10.49%
Halliburton CAPS Rating: *****
SLB $73.85 Up +3.76 +5.36%
Schlumberger CAPS Rating: ****
WFT $9.29 Up +1.03 +12.47%
Weatherford Intern… CAPS Rating: ***