What's the Best Way to Play 'Saudi America'?

The U.S. is realizing huge oil and gas production increases and now is the top producer woldwide. Given this context, what's the outlook for Marathon Oil, Hess, and Apache?

Jul 8, 2014 at 3:49PM

Interesting things are happening in the U.S. oil and gas exploration and production sector. First of all, thanks to the rise of unconventional oil and gas, production in the U.S. is expected to increase 12% this year, turning America into the top oil producer worldwide. According to new data released last weekend by the Energy Information Administration (EIA), this past January the U.S. was the No.1 petroleum producer in the world. But technically, 'Saudi America' has been the top producer of total petroleum products for 15 months in a row starting November 2012, surpassing Russia, and Saudi Arabia. Intense.

But this is not all, long term estimates are also pretty bullish. The International Energy Agency (IEA) estimates that U.S. oil production will rise to 11.6 million barrels a day in 2020, as it taps rock and shale layers in North Dakota and Texas using horizontal drilling and hydraulic fracturing.

Refocusing on America
Given the circumstances many American companies are refocusing production toward the U.S. Marathon Oil (NYSE:MRO) is a great example. The company has agreed to asset sales worth $6.2 billion since 2011, including the sale of a $1.5 billion stake in an Angolan oil field in 2013. This past month, Marathon also agreed to sell its North Sea oil business in Norway for $2.1 billion in cash. What it will do with the money? It will push its American shale oil investments and boost its share price through repurchases. In fact, this year Marathon will spend $3.6 billion, more than half of its total budget, on unconventional plays. No Joke.

More than 60% of this money will be allocated to the Eagle Ford shale play, precisely to drill more than 250 wells this year. Most of the remaining cash will go into the Bakken shale region and Oklahoma Woodford, strengthening investments in its most prolific U.S. assets.

What's the strategy? Marathon is executing a transition to higher-density pad drilling and rebuilding uncompleted well inventory. As a consequence, the company expects production to increase 30% this year just in these three areas.

And this is not all. In the search for more cash, Marathon also wants to sell its British business, but it has not yet received an acceptable offer. Regarding share repurchases, Marathon Oil completed a $500 million share buyback in 2013. This year we'll see some more buying action. The board of directors declared that some of the money obtained in the sale of its North Sea business would be used in share buybacks.

Not alone
Marathon isn't the only company refocusing in American shale. Two good examples are Apache (NYSE:APA) and Hess (NYSE:HES), which have been putting assets on sale to reduce overseas exposure and raise some money for local investment. Hess said in April that it was selling its interests in two Thai fields for $1 billion. Last year, Hess sold assets in Indonesia for $1.3 billion and in Russia for $1.8 billion. Apache let go its Argentine business for $800 million while in 2013 sold approximately a third of its operations in Egypt for $3.1 billion.

Apache itself was a pioneer, as it started an aggressive divesting strategy earlier than its peers. In 2009 its shareholders were worried that the company was taking on too much debt and issuing more shares of stock to fund expansion, diluting share value. Apache's management knew back then that they had to do something with enough impact to calm down the investors. The strategy was simple: shrink to grow. Now Apache is actually smaller than it was only 18 months ago.

However, price-wise this is not the case. The stock is now up about 25% compared to a year and a half ago.

APA Chart

APA data by YCharts

The case for Hess a bit different. The company is not only refocusing on the U.S. but has also been through a transformation into a pure-play E&P company. The culmination of its strategy was selling its gasoline stations to Marathon Petroleum (former subsidiary of Marathon Oil) for $2.6 billion in May.

Final thoughts
E&P in America is alive and kicking, and production will continue to increase. We should also not forget that the U.S. is the world's largest oil consumer and still imports plenty of crude. So, considering that local demand remains strong, the fears of an oversupply scenario are pretty low. In a few words, these companies will enjoy more activity with good pricing. 

Marathon is in a good position to get a piece of this market. The prospects for increasing production are highly positive. The company is making the right decisions and remains a solid choice.

Hess' new focus makes sense as well, and it will simplify the company's operations. On the contrary, Apache's valuation could be carrying a good deal of expectations with fewer assets supporting its valuation. Since mid-March the company has been rallying, but without presenting solid results in terms of production or efficiency gains, volatility could come soon.

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Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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