Unconventional Drilling Still Has Room To Boom

By Aaron Levitt | August 22, 2014 AAA

It’s amazing just how much energy North America is producing these days. The widespread adoption of hydraulic fracturing and horizontal drilling have opened up a sea of oil and natural gas that has completely changed the global energy landscape.

And yet, despite the torrid production gains, there is still plenty of oil and natural gas to be unlocked in North America. For investors, that means betting on the energy sector and unconventional drilling for years to come. (For more, see: Why Schlumberger Is A Name You Should Know.)

Rising Production

While fracking has been around since the 1940s, it wasn’t until the late 2000s when the drilling technique was coupled with horizontal drilling for the first time. And energy exploration & production (E&P) firms haven’t looked back since. As of the end of 2012, there have been over 2.5 million hydraulic fracturing jobs performed on oil and gas wells worldwide. However, North America remains the fracking and unconventional drilling epicenter. (For more, see: Fracking Can't Happen Without These Companies.)

As the exploitation of shale fields like the Bakken, Marcellus and Eagle Ford has progressed, production of both natural gas and crude oil continues to exceed previous records. According to energy reporting service Platt’s, natural gas production rose by 0.5 billion cubic feet per day (Bcf/d) to reach an average of 68.5 billion Bcf/d in July. That’s the highest monthly average on record and builds upon June’s record production numbers. (For more, see: A Guide To Oil And Gas Plays In North America: Williston, Bakken and Three Forks.)

Not to be outdone, crude oil production in the U.S. has also surged. In fact, that production has hit its highest level in nearly 27 years. According to the Energy Information Administration (EIA), crude oil production in the U.S. averaged roughly 8.5 million barrels per day in July. That’s the highest amount since April 1987. (For more, see: How Does Crude Oil Affect Gas Prices?)

Canada and Re-fracking, Too

And as impressive as these numbers are they don’t take into account rising unconventional energy production in Canada. Canada has benefited from fracking and advanced drilling as well. Nor do the numbers highlight the potential continued production growth. There’s still plenty of untapped acreage in North America’s various shale fields. The EIA estimates that crude oil production in the U.S. should hit 9.3 million bpd. (For more, see: Oil And Gas Industry Primer.)

Also contributing to that growth is the new trend of re-fracking. Firms like EnCana Corp. (ECA) and Marathon Oil Corp. (MRO) have begun re-fracking older wells drilled in the Bakken and Haynesville shales using current technology. That’s allowed them to extract more oil and gas from these wells. As re-fracking takes off, the energy boom could enter another growth phase. (For more, see: How Fracking Affects Natural Gas Prices.)

Betting Big On Unconventional Energy

Given just how massive fracking and energy production has become, investors with longer term timelines should seriously considering adding oil and gas stocks to their portfolios. Two great places to start are the Market Vectors Unconventional Oil & Gas ETF (FRAK) and the First Trust ISE-Revere Natural Gas ETF (FCG). (For more, see: ETFs For Playing The Surge In Unconventional Energy.)

The First Trust fund tracks firms who receive a substantial portion of their income from natural gas production. Top holdings for FCG include fracking leaders like Devon Energy Crop. (DVN) and QEP Resources Inc. (QEP). So far, FCG has managed to register good – although volatile – performance and has returned 8.48% annually over the last five years. FRAK covers the wide world of unconventional energy including shale oil and other sources like coalbed methane. That broader mandate has helped the fund return nearly 15% this year as production continues to surge.

Playing Re-fracking

For those looking to play the growing use of re-fracking, the trio of EXCO Resources Inc. (XCO), Denbury Resources (DNR) and CARBO Ceramics Inc. (CRR) could be top choices. Unlike larger E&P firms, smaller EXCO could have the most to gain from using re-fracking, as it will make a the biggest dent in production volumes. Already XCO has begun testing wells drilled back in 2010 and has identified more than 400 additional wells to be re-fracked. Denbury already is the leader in using enhanced oil recovery (EoR) techniques to extract more oil per well from its older holdings. (For more, see: Pipeline Plans Are A Big Win  For The Oil Sands.)

Meanwhile, in order to re-frack a well, E&P firms need to use a higher-tech blend of proppant and chemicals in order to open older wells. CARBO remains the biggest supplier of ceramic and specialized proppants to fracking firms. For investors looking to bet on all the “fancy” equipment to make hydraulic fracking work, the iShares Dow Jones US Oil Equipment Index (IEZ) is still one of the best plays for the oil services industry. (For more, see: Guide To Measuring Oil And Gas Companies.)

The Bottom Line

For investors, the unconventional drilling boom is the gift that keeps on giving. Despite the recent record productions gains, more could be in store for the energy industry as new techniques continue to unearth more oil and natural gas.

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