Big Money Blowing in the Shale Gale

How can you make money by investing in the stock market? It helps to go where the money is flowing. Along those lines, two of the strongest sectors of the current U.S. economy barely existed a few years ago.

In fact, one sector was left for dead (and I mean roadkill!) when the U.S. government effectively shut it down overnight in 2010. The other sector was rooted in then-novel technology that few people understood, and in which only visionaries saw the future.

Yet now, both investment sectors are moving fast. They channel eye-popping levels of capital and generate big bottom-line profits for a myriad of companies that I’ll name below.

So what are these promising investment spaces? The short answer is… we call them “onshore” and “offshore.”

That is, currently fast-growing sectors include companies that support drilling for oil and gas in so-called “tight” geologic plays, meaning rock formations like shale and low-porosity sandstones. Fast-movers also include offshore-oriented companies that are still healing from the awful disaster of 2010, when a BP well blew out in the Gulf of Mexico.

Big Money Blowing in the Shale Gale

Let’s start with the onshore “shale gale.” How much money is blowing in this wind? There’s a solid study just out from the American Petroleum Institute (API), which knows a few things about the energy industry.

According to API, in 2011, the U.S. energy industry invested over $65 billion, drilling over 10,000 wells just for shale oil and shale gas. This $65 billion sum is over half of the total energy industry capital expenditure (capex) for all new wells in the U.S., an amount that itself exceeds $125 billion.

Indeed, the shale number is big, and growing at a fast clip. According to API’s 2011 Joint Association Survey on Drilling Costs, overall capex for shale drilling increased 87% from 2010 levels. Dramatically rising investment numbers illustrate the growing importance of shale reserves as a source of domestic energy supply, and as a destination for U.S. energy development capex.

Even more remarkable is the immediate history of this fast-growing sector of the energy industry. The API report notes that expenditures on shale drilling represented barely one-fourth of overall investment for all wells in 2009. In other words, shale drilling was a relatively small play as recently as four years ago, and even smaller as you go further into the past.

Yet as of 2011 (the most recent year for the necessary levels of detailed statistics), shale drilling accounted for more than half of total well drilling capex. This is a remarkable testament to the mobility of capital within the U.S. economy, even in an industry with as much federal, state and local regulation as well drilling.

Who benefits from this massive flow of new capital? As you can imagine, funds are flowing to large onshore drilling companies. Beyond the drill rig operators, funds are flowing to critical technology-driven oil service companies that help deliver barrels from directional, multi-staged fracked wells.

Offshore Loss… Onshore Gain

In a strange irony, the onshore shale gale is related to that above-noted BP blowout offshore in 2010. After the Gulf of Mexico accident, the U.S. government effectively shut down drilling by imposing an immediate moratorium on almost all offshore operations. This caused significant damage to the U.S.-based offshore industry, although many companies redeployed people and assets overseas or toward onshore prospects.

Offshore, the raw numbers reveal a dramatic scale-back of U.S. capex in 2010 post-blowout. Looking back to 2009, total U.S. capex offshore was nearly $25 billion. But in 2010, after the BP blowout, that number plummeted to a mere $4 billion — an 84% decline — in the wake of the Department of the Interior (DOI) offshore drilling moratorium.

Then in 2011, reflecting a slight recovery in the face of the DOI so-called “permitorium,” offshore capital expenditure rose to just over $8 billion. It was a “double,” so to speak, from 2010. But in the grand scheme of things, the 2011 statistics are still shockingly small — less than one-third of the 2009 number.

Offshore Rebound

Now in 2013 and with reasonably strong oil prices, we’re beginning to see more of the offshore rebound. Between the Gulf of Mexico and many other developing offshore locales around the world, we have numerous firms whose share prices have moved upward strongly over the past year, with more good news coming as capex increases toward 2009 levels.

On the seafloor, we have cutting-edge machine builders like FMC Technologies (FTI) leading the way.

Envelope-Pushing Operators

This discussion of onshore shale fracking and offshore support and service companies doesn’t begin to get into the array of large and intermediate-sized operating companies that are pushing an impressive number of new projects. Collectively, operators are moving the edges of many an envelope for new technology in both the fracking and the offshore worlds.

Consider some of the big names like Total, with its global reach and 5.5% dividend yield. Or Shell Oil, with a 5.3% yield. Or Statoil and its solid 3.8% yield. Even the above-noted BP is paying a handsome 4.9% yield, while recovering from its legal and financial issues related to the 2010 blowout.

Nor am I touching on the technical and operational progress we’re seeing in a completely different hydrocarbon realm, namely Canadian oil sand players.

Look Out Below! More Barrels On the Way!

For the foreseeable future, more and more capex is moving into onshore “tight” energy plays and offshore opportunities. These are long-term investment trends in which the funds are dedicated, the contracts are signed and the barrels are coming. We’ll see more and more wells, onshore and offshore, with more and more capex flowing to the service and equipment providers.

Looking ahead, North American oil and gas will add to our continental-scale energy security — which is NOT the same thing as so-called “energy independence,” a silly and confusing term (and another story entirely).

For now, we have plenty of investment opportunity in the energy sector just among big-name, large-cap companies. These ideas are founded on great technology and human skills, while the business models boast long, deep books.

Most of the plays described above offer respectable dividend yields, which means that they sort of “pay you” to own their shares. As I said at the beginning of this article, you should go where the money is flowing, and that happens to be the energy world for now.

That’s it for now. Many thanks for reading.

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