In a domestic energy market developing faster than just about anyone can remember, the key for investors is in finding an edge.
That's not easy in a natural gas market bloated with inventory. But oil is a different story. Those domestic oil companies innovating new schemes to get their product to market or pulling more oil from the ground are at the leading edge of America's energy renaissance.
"Oil is growing faster in the U.S. than it has in 20 years," says Dahlman Rose & Co. analyst Nicholas Pope. "The pipelines can't keep up."
"You'd be hard pressed to find a time when more pipeline was laid in the U.S. than in the last four years," he said.
And in the meantime, one way of gaining an edge has been using other means of transport.
"Continental Resources has been better at the logistics of moving oil. As an early entrant to the Bakken" — the rock formation in Montana and North Dakota producing hundreds of millions of barrels of oil — "it has done a great job," Pope said. One key has been an embrace of rail transport, by which Continental moves half of its oil.
Whiting Petroleum is another Bakken producer Pope likes. "They got off to a slower start, but have gotten more aggressive in the past year," in part by using rail, he said.
A Citigroup report from earlier this month estimated that over half the North Dakota crude production — of 480,000 barrels a day at the end of 2012 — was moved by rail. The same report said U.S. oil and gas production is developing so fast that energy independence (with a little help from Canada) is within sight.
The innovations in U.S. oil and gas drilling, and the challenges, will be among topics of discussion at the 32nd annual IHS CERAWeek energy conference in Houston, which starts Monday. The conference features sessions on nonconventional drilling as well as the new geography of supply and demand.
Both Continental and Whiting reported earnings Wednesday that surpassed Wall Street forecasts. On Thursday, Stifel raised its price target for Continental to $90 from $83, which closed at $85.81 Friday.
AIS Group money manager John Hummel sees the price of oil being inexorably on an upward trajectory over the long run, with new demand from China and India, among others, far outstripping newly discovered supply.
"We feel oil prices are headed much higher," Hummel said. "Opportunities are in those companies with the proprietary advanced technology to get more oil out of new and existing fields."
But there's hardly consensus around oil prices, and indeed they've slipped about 7 percent in the past month. The Citigroup report predicts U.S. energy production will help push down crude prices — from the recent range of $90 to $120 per barrel to $70 to $90 per barrel by the end of the decade.
Another analyst, John Kilduff of Again Capital, see the various forces tugging both ways on oil — U.S. production gains, refinery closures, a Saudi production dial-back — bringing a kind of equilibrium. He see prices this year staying between $80 and $110.
Natural Gas Landscape
There is an estimated 2,200 trillion cubic feet of recoverable natural gas in the U.S., which the Energy Information Administration says could be a century's worth.
The results of an in-depth University of Texas at Austin study announced Thursday project that the Barnett shale — which underlies some 17 Texas counties and is the second largest in the U.S. — could keep producing low-cost gas through 2030.
The natural gas opportunities loom large, but so do environmental concerns.
The drilling, which depends on the use of hydraulic fracturing, or fracking, has met fierce opposition in other areas with large shale formations, such as the Marcellus, which stretches from New York to Virginia, due to concerns about pollution of water supplies and other environmental impacts.
(See slideshow: Fracking: How It Works, Where It's Done)
In the near term, a mild winter that has kept heating demand low has backed up inventory, a Morgan Stanley report released Monday said.
This week several major natural gas interests, ONEOK, DCP Midstream Partners, Copano Energy and Western Gas Partners among them, reported earnings. Shareholders showed some disappointment in each in the days following. ONEOK, for one, beat estimates, but showed earnings decline from last year, and worse, reduced guidance — roughly 20 percent for the full year.
On the other hand, a longer-term indicator, the NYSE Arca Natural Gas Index, is up 22 percent since June 2012 lows.
Already, supply growth has been more than the market can handle, Pope said, at a time when not a lot of new wells are being drilled. And Morgan Stanley expects Marcellus production to grow in 2013 "as the region's infrastructure de-bottlenecks."
"We've seen fits and starts on the demand side, from chemical companies and refiners, for example," Pope said. "But it's nothing that can handle the scale of what's happening on the supply side, where we've had some 35 percent increase from onshore alone in the past five years."
The only thing that would really turn things around for natural gas in the near term would be something like adoption for transportation, he said, but added that there's no domestic energy policy to incentivize such a thing.
However, some are making a push. Billionaire energy magnate Boone Pickens joined New York Mayor Michael Bloomberg last week to unveil the city's first natural gas-powered food truck.
Pickens told CNBC's "Squawk Box" there is potential to transform the global energy picture. "You can knock out OPEC by just taking the diesel trucks, 18-wheelers, to natural gas," he said. "You can take OPEC out. It's that easy."
In the meantime, for lack of better alternatives, natural gas companies go to the "expedient solution," Pope said, of exporting liquid natural gas overseas, where they can command five to 10 times better prices.
The Morgan Stanley report also saw exports to Mexico as offering relief to bloated natural gas inventory, as do defections of users of coal, which is undercut both by low natural gas prices and more stringent rules from the Environmental Protection Agency.
Kilduff notes that there's less gas in storage this year than last, and says that as natural gas displaces more coal for electricity, the unit price will stabilize at $5 to $7 per unit, from a bottom below $2 last year. It's currently around $3.50.
The key to finding an edge among natural gas companies, Kilduff suggests, is size and technology, citing Exxon Mobil as an example of a company with a large gas portfolio.
Also, despite the controversy, he said shale plays are where it's at. "The technology is improving markedly even now," he added.
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