There are hundreds of shale wells being drilled outside of the United States using fracking and horizontal drilling -- the transformational techniques that pushed natural gas prices to historic lows in the domestic market. If the U.S. experience is any indication, the world could soon be awash in oil and cheap natural gas. Beware the hyperbole!
The shale gas boom was huge in the United States, leading industry giants like ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS-B) to spend heavily for a seat at the table. Smaller players like Chesapeake Energy (NYSE:CHK) became market darlings because of their property acquisitions.
Although the gas revolution is real, the land grab hurt investors more than it helped them. For example, Exxon admits that the $40 billion it paid for gas specialist XTO Energy was too much, suggesting that it was years early with the purchase. Shell, meanwhile, is selling off shale land and taking big write-offs.
The poster child of shale excess, however, is probably Chesapeake. The company's shares plummeted as investors started to realize that the debt it took on to buy land would be hard to pay off with natural-gas prices at historic lows. That led to a public battle with Carl Icahn that ousted the company's co-founder. With a new CEO, the company has shifted gears and is starting to focus on working its own properties -- a process that's included land sales.
Beware the hype
So, even though the U.S. shale potential is material, many investors have gotten hurt. That's why you need to be wary about headlines that suggest the world is on the verge of a U.S. type shale boom. In fact, Maria van der Hoeven, executive director of the International Energy Agency, told Bloomberg "...you just can't copy the U.S. experience."
Shell's CEO provided a key warning, telling an audience that "...it is very dangerous when we hype things, because it sets expectation which perhaps can't be fulfilled..." He points to Poland as an example of a country where drillers went in with high hopes that didn't pan out. "We never talk about the basins that have not worked," he noted.
That said, the global opportunity is real. "But not everywhere at the same time," as the IEA's van der Hoeven notes. Although it would be nice to believe that a relatively small country like Poland could transform itself overnight, that's just not likely and is far more risky than the potential of countries with larger land masses -- like China and Russia.
That's where big, international oil and gas giants come into play. For example, Shell is working with China National Petroleum to explore for natural gas and oil in China. That gives Shell a foothold in the country with the largest shale-gas reserves and the third largest shale-oil reserves in the world. Add in Shell's experience in the liquified natural gas space, and this out-of-favor giant looks like it is making the right moves for long-term success.
BP (ADR) (NYSE:BP), meanwhile, has been working with Russia's Rosneft, recently inking key deals for oil and refined products. BP is Rosneft's second largest shareholder. Although Russia is only ranked ninth for shale-gas reserves, it's No. 1 for shale oil.
Of course BP and Shell have very different risk profiles. Although Shell has struggled amid difficulty in finding new reserves, BP's out-of-favor stock stems from the Deepwater Horizon oil spill; the impact of which is still an overhang on the shares. While the worst may be over for BP, the legal and political fallout certainly isn't. So, despite similar yields in the 5% area, Shell is probably the safer of the two options.
Don't get burned
There will be money made in foreign shale. However, the hype that hurt investors in the U.S. market could easily take the same toll elsewhere. There is a long-term opportunity, but it's probably best to stick with big players like Exxon, Shell, and BP so you don't get caught when the next Chesapeake flames out.
Don't miss out on the U.S. shale boom in its prime