On October 17, 1973, The Organization of the Petroleum Exporting Countries (OPEC) implemented an oil embargo against any country that supported Israel in the Yom Kippur War. At the time the U.S. was importing 27% of its annual oil needs. Oil prices went through the roof and the New York Stock Exchange lost $97 billion of its value.
Flash forward 40 years and America has become an energy giant. Since the embargo, the U.S. has seen its population increase by 50% and its GDP has grown TO $14 trillion from $5 trillion while its oil consumption has increased by only 7%. Then factor in the shale gas boom, horizontal drilling and other methods of extracting oil from the ground and in the Gulf of Mexico and you can see why the U.S. has such an enviable energy position.
Who will benefit most from this renaissance? Here are four all-cap picks in U.S. oil and gas.
PrimeEnergy (Nasdaq:PNRG) is an independent oil and gas producer that operates 1,600 wells in Texas, Oklahoma, West Virginia, Gulf of Mexico, New Mexico, Colorado and Louisiana as well as holding non-operating interests in 800 more. Every ounce of oil and natural gas it produces comes from US soil and is sold to independent marketers and pipeline companies. It's a big part of the US energy renaissance.
PrimeEnergy is boosting its oil production while cutting the amount of natural gas it generates to take advantage of the industry-wide move from natural gas to oil. In 2012, the company produced 745,000 barrels of oil; by far its largest output in the past five years. With 13.1 million barrels of oil in reserve it will take the company almost 18 years to eliminate its supply. Meanwhile, it produced just 4.7 billion cubic feet of natural gas from reserves of 40.4 billion cubic feet. In 2012 oil revenue accounted for 76% of its total with gas the remaining 24%. If you believe in the U.S. oil boom this is a good pure-play to bet on.
Denver-based Bonanza Creek Energy (NYSE:BCEI) is an oil and gas exploration and production company. Its main assets are in Colorado and Arkansas where 73% of its production and 91% of its revenue in 2012 was from either oil or natural gas liquids. In terms of reserves, it has 350 million barrels of oil equivalent including 17 years of production at its Wattenberg field in northeast Colorado. According to Credit Suisse, its 87 wells at Wattenberg are some of the top performing oil resources in the country.
Bonanza Creek went public in December 2011 at $17 per share. Originally expected to price its IPO at as high as $22 a share, the disappointment sent its stock tumbling right and it closed at $12.50 at yearend. In the 21 months since then it's gained 317% through mid-October, far eclipsing most of its peers. Year-to-date it's up 87.6%, 65 percentage points higher than the S&P 500.
In September Goldman Sachs (NYSE:GS) mentioned four stocks it expects to deliver long-term growth in the small- and mid-cap E&P sector. Bonanza was one of them. In business for just 14 years, it's come a long way thanks to its move to horizontal drilling.
Cimarex Energy's (NYSE:XEC) operations in the Permian Basin include 122 wells with proved reserves of 697 billion cubic feet equivalent as of the end of 2012. Its production in the first part of 2013 was 50% natural gas and 50% oil and natural gas liquids. Although oil generates just 32% of its production in terms of volume (Gas 50%, Oil 32%, NGLs 18%), that amounts to 63% of revenue in dollars. As a result of its strong returns from oil and liquids it continues to invest heavily in the Permian Basin in West Texas and New Mexico as well as at its Cana-Woodford shale properties in Western Oklahoma.
Analysts keep upping its target price. Raymond James (NYSE:RJF) raised its target October 14 by $12 to $106. Others increasing the target price above $100 in October include Cowen & Company and Societe Generale to $110 and $112 respectively. This type of herd mentality usually indicates another move is in the works. However, with its stock up 84% year-to-date through October 16, it's unlikely to be substantial; at least not in the next three to six months. Historically it's outperformed both the index and its E&P peers. That you can take to the bank.
Continuing on this theme of energy independence, no one does it better than Continental Resources (NYSE:CLR), whose founder Harold Hamm was the 13th and last child of sharecroppers in Oklahoma. Continental generated 57% of its production in the second quarter 2013 from the Bakken formation, primarily in North Dakota. The company is the largest acreage holder in the Bakken with more than 1.1 million acres producing 88,000 barrels of oil equivalent per day in the region. It's definitely the bread and butter of the company.
However, there are other areas generating good production including SCOOP (South Central Oklahoma Oil Province), which contributed 17,550 barrels of oil equivalent per day in Q2 2013. Overall, Continental is producing 140,000 barrels of oil equivalent per day, a 16% increase over its first quarter production. From a profit perspective its earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, for the first half of 2013 was $1.33 billion, $30 million higher than all of 2011. Expect Continental to generate $3 billion in EBITDAX for all of 2013.
Having grown its proven reserves over the past three years at a compound annual growth rate of 44%, Continental is well on its way to tripling its production by 2017. With 70% of those proved reserves in oil, it's clear Continental sees a greater future in oil than natural gas. It's another example of a US oil company doing well at home and not in some far flung region of the world.
The four stocks I've selected all produce oil and gas exclusively in the U.S. There's no doubt the energy business is thriving in America. Year-to-date, the four are averaging a total return of 83% through October 16. Can they keep it up? Not likely, But they are all very good at what they do — and they're all focused on maintaining America's energy independence, which is definitely a good thing.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.