When it comes to America's oil and gas renaissance, the numbers are staggering. For example:
- America's estimated reserves of shale oil stand at 223 billion barrels and 2,421 trillion cubic feet of natural gas (81 years' worth of last year's record production).
- The Marcellus Shale contains an estimated 410 trillion cubic feet of gas (110 years' worth of output), and it has increased production 14-fold since 2007 and is projected to double again by 2035.
- According to Pioneer Natural Resources, the Midland basin contains 75 billion barrels of recoverable oil (estimate up 50% in last year).
- Last year, oil companies spent $650 billion on exploration and production.
- By 2035, it's estimated that the U.S. will need to invest $641 billion in energy infrastructure.
With such vast sums of money, investors may be looking for a good way to cash in on the energy boom. This article highlights two unique angles for playing the energy bonanza -- ones most investors haven't considered.
New drilling techniques, new investing opportunities
New drilling techniques such as downspacing (placing wells closer together) are greatly increasing production per well and individual well profitability.
With an average well costing $8 million to drill, oil companies are eager to maximize the returns on their investments, and technology such as proppants (materials that prop open the fractured rock) and oil well concrete are in high demand. In fact, the newest drilling techniques can frack 330% more land/well but require 360% more frack sand, between 5,000 and 8,000 tons of sand/well.
Hi-Crush Partners is one of my favorite MLPs. With a 4.3% yield and analysts projecting 18.5% annual distribution growth over the next decade (on the back of 23% earnings growth), this is likely to be one of the best income investments in America. What is driving this phenomenal growth? Three words: Bakken, Marcellus, and Utica. These are the three shale formations Hi-Crush is strongest in -- it has three times the distribution centers of its nearest competitors in the Marcellus.
Demand for frack sand has been growing at 28.3% annually and is projected to grow at 10.25% CAGR through 2022. This has caused prices of frack sand to climb to $110/ton. Hi-Crush, which sold 1.85 million tons of sand in 2013, is heavily investing in expanding its mining and distribution capacity. For example, on May 22, it opened a new mine in Whitehall, Wisconsin, that will be capable of producing 2.6 million tons of sand per year. This mine is just one of several projects designed to increase capacity from 1.6 million tons to 6.4 million tons per year by the end of 2014 (325% production growth in one year).
Hi-Crush recently raised its guidance for 2014 sand sales by 60% (to about 4 million tons), and 2015 guidance of 5 million to 6.4 million tons. With 3.2 million tons of sand contracted for 2014 and 4 million tons for 2015, the MLP is well on its way to achieving its ambitious growth plans. Investors should be further cheered by Hi-Crush's June 17 announcement of a five-year contract with Liberty Oilfield Services, which comes just weeks after news of major contract extensions from Weatherford International and U.S. Well Services. The previous announcements raised Hi-Crush's average contract length from 32 months to four years, but five-year terms are becoming the new normal, creating cash flow predictability that secures the current distribution and sets it up for strong and consistent growth in the future.
Eagle Materials is a leading provider of construction materials and oil well concrete that is now breaking into the proppant business in a big way. Management believes its frack sand segment may be worth as much to earnings as its current businesses.
Strategically located near the prolific Eagle Ford shale, Eagle Materials' first sand facility will soon be joined by an expansion of its Illinois mine (targeting the Utica shale). The total cost of the mine is expected to be $33 million to $58 million, but it will bring in $4.5 billion over its 45-year projected life span. Analysts estimate 36% margins on frack sand, and with Eagle Materials targeting sand production of 4 million to 5 million tons within two or three years, I feel current analyst estimates of 13% earnings growth (dividend growth 7.5%) over the next decade are likely overly conservative, accounting only for the current concrete and construction business.
As the graph illustrates, Eagle Materials (without its frack sand business) has crushed the market with 18.8% annual total returns vs 9.7% for the market over the last 21 years. I am confident Eagle Materials' new, highly profitable and fast-growing business segment will result in even greater results in the future.
Hi-Crush Partners and Eagle Materials represent two excellent niche providers of vital basic materials powering America's oil and gas boom. Their aggressive growth plans and excellent industry relationships mean patient long-term investors are likely to experience market-beating returns for decades to come.