The price tag for American energy independence is well over $2 trillion. Energy companies just don't have that kind of money laying around. While they do enjoy a quick initial payback once wells come on line, steep decline rates make it tough to continue growing production as new wells need to be drilled just to offset current production declines. It is a problem that will only be addressed with one thing: money.
The great American capital scramble
By some estimates, developing our resources will cost the industry about $70 billion per year over the next 30 years. In some regards, that's not a lot of money. We already hand OPEC a lot of money each year and our overall energy imports cost our economy $400 billion each year. The problem is that some of the OPEC nations can produce oil much cheaper than we can, meaning that with oil over $100, producers in those countries are swimming in cash. In America, developing shale oil and gas resources is very, very expensive -- in some cases costing more than $10 million per well -- and the country needs a lot of wells drilled each year. This means that smaller U.S. oil and gas companies don't make a whole lot of money.
In fact, most of these smaller independent oil and gas companies spend every penny that's made and then some. For example, SandRidge Energy (UNKNOWN:SD.DL), which is targeting the Mississippi Lime in Oklahoma and Kansas is planning to spend $1.45 billion this year to grow its oil and gas production. The only problem with that is it doesn't make anywhere near that amount and currently has just enough money to last it through the end of 2015 at its current growth rate. Here is the problem: While SandRidge currently has about $2 billion in liquidity, the company sees the potential for 3,000 wells just in its core Mississippian acreage. With costs around $3 million per well, the the company is about $7 billion short of developing just its core acreage. While the company does have assets it could sell to bridge that gap, it simply won't ever generate enough cash flow to develop its resources unless gas and oil prices skyrocket.
SandRidge's future shortfall is really just a drop in the bucket compared to that of Pioneer Natural Resources (NYSE:PXD). The company has gone on record saying that it needs between $300 billion and $400 billion in capital to develop its acreage in the Permian Basin. That's an unbelievable sum of money for a company that is currently only worth about $25 billion. However, with the potential for 9 billion barrels of oil equivalent in the land under its control, the company will figure out a way to extract it, even if it has to join SandRidge and start investing well above its cash flow.
Here's how you can help
What these companies really need is access to capital, and that can come in a variety of ways. Investing directly in a company like SandRidge or Pioneer is certainly one way that investors can help fund America's drive to energy independence. However, there are other less riskier ways that investors can participate.
One option is to invest in a company like Vanguard Natural Resources (NASDAQOTH:VNRSQ). The oil and gas MLP will purchase older oil and gas assets from faster-growing peers that need the capital. It then locks in the cash flow by hedging the oil and gas out several years, while investing minimally in order to maintain its production. That allows Vanguard, thanks to its MLP-like structure, to turn these assets into cash flow machines. The company pays a monthly distribution to investors, which is a very generous 9% on an annualized basis.
Another option is to invest in the companies providing innovative solutions to save oil and gas drillers money, such as oil-field service companies like Halliburton (NYSE:HAL) or Baker Hughes (NYSE:BHI). Halliburton is working on its "Frac of the Future" program which is designed so save producers money. In one example, the company is utilizing natural gas powered service equipment, which saves money by reducing the use of diesel. Not only that but it's bringing green energy to the oil field through its use of solar panels on a critical piece of equipment, which reduces both its carbon and physical footprints.
Meanwhile, Baker Hughes has been working with oil and gas producers that have been moving aggressively to multi-pad well drilling. That move is saving producers like Pioneer upwards of $700,000 per well, which is enabling the company to drill the same number of wells as it did last year, but with 20% fewer drill rigs. Despite those savings, Baker Hughes actually earns margins that are 30%-50% higher, which is great for its bottom line, and its investors.
Fool contributor Matt DiLallo owns shares of SandRidge Energy and has the following options: short September 2013 $5 puts on SandRidge Energy. The Motley Fool recommends Halliburton. 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.