Double Shale Play in Energy Approaches: EnCana and Continental Resources

By Brandon Clay

No sector has escaped the economic calamity since the stock market peaked twenty months ago. The Bush-Obama stimulus plans are now reflating stocks. Commodity-related sectors typically thrive in these conditions. Could energy once again be in the spotlight?

Estimates suggest 90% of our energy consumption still comes from non-renewable resources. As hip as green is, most of us still put unleaded gas into our cars and turn on lights powered by coal-generated facilities. Driving a Prius may get you invited to cocktail parties, but owning oil royalties can pay your mortgage.

That’s why we’re looking for good entry points on two energy stocks. The first one we like is EnCana Corporation (ECA). EnCana is a large-cap, Canadian energy company that produces natural gas and oil. They’re looking for a partner to develop the Texas/Louisiana Haynesville Shale acreage, highlighting their strategic direction as an energy producer. Canada’s Financial Post pointed out other reasons ECA looks attractive.

“We tapped into the Google Finance stock screener to sift through 2,824 companies, highlighting those with a market capitalization of $10-billion or more, a price/earnings ratio of no more than 10, a dividend yield of at least 2%, a net profit margin of at least 20% and five-year earnings per share growth rate of at least 20%. The site spat out a list of five companies, including EnCana. EnCana also popped up when we keyed in a set of characteristics focusing on companies with easily managed debt levels, and on a third list when we searched for large-cap stocks whose shares were down at least 40% over the past year.”

Natural gas prices rebounded strongly in May only to show signs this week of rolling back over again. A battle is underway: the lower energy demand of a lousy economy vs. the threat of a currency crisis and continued monetization of the nation’s debt. Gas prices appear ready to move much higher if the “green shoots” take root. However, if deflation returns energy prices could collapse. That’s one of the reasons why EnCana stock is unable to break above resistance around $57. There appears to be good support in the low $50’s, so a reasonable purchase price could be at hand after another day like today.

The other “shale play” we like is Continental Resources Incorporated (CLR) because of their enormous stake in the Bakken Shale. Located on the North Dakota/Montana border and extending into Canada, the Bakken Shale is oil-rich. USGS estimates suggest as much as 4.3 billion barrels may be recoverable on the US side. Continental Resources has 581,000 acres under lease. They’re not the only ones exploring the Bakken Formation, but the near-billion dollar company is well positioned for healthy production in the area.

As energy prices rose in recent weeks, CLR has gone along for the ride. Can they sustain the trend if oil pulls back into the $50’s? Because of CLR’s unique position in this sector, we expect it to outperform in an energy bull market. CLR’s recent breakout failed, so you might try to buy it around $26.00.

If you’re looking for a couple of unique energy shale plays, go with natural gas giant ECA and Bakken Shale producer CLR.

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Comments

[blu:]

As a reference point, I would suggest that investors take a look at the historic production data from the Barnett Shale play in Texas.
The percentages of commercial wells vs. non-commercial wells is not pretty. The depletion rates are incredibly high.

Admittedly, I am no expert in this arena as I have not pursued the play.
However, there are times in the oil business that you can save yourself a lot of money and angst by using some common sense and observing others.

Many oil producers know that if a reservoir requires a huge frac to break it open, it will result in a less than desirable payback (ROI).
Even though the newest technology in fraccing is being employed, I remain very skeptical of the long term production from these shales. There is usually a nice amount of flush production, that results from "blowing up the balloon" with the frac. This is followed by rapid depletion. The initial production can be sustained long enough to provide misleading reserve estimates, that will have to be written down if fairly short order.

As with most things, time will tell us exactly how economic these shale plays will be. Based on my general experience, I choose to avoid those playing the shales until I see some time tested results.
JMHO and time could prove me completely wrong.

Jun 04 01:43 PM

[Shotei:]

Global Resource Corporation is the only cost efficent and environmentally safe way to deal with shale.
www.globalresourcecorp.../

Jun 05 09:22 AM

[Shale Gas:]

Penn Virginia just announced a successful well in the Haynesville Shale. I also believe, like the author, that these two areas will provide huge reserves and production to companies developing these shales.

Jun 05 11:12 AM

[H. T. Love:]

Insertion this week of NG was +124Bcf vs. expected 100-115, a 3.3-7.8%(?) surprise and oil surprised with a +1.55MM bbls increase.

Bill Perkins, an energy trader based in Houston, in after-market comments, said NG storage is "near overflowing" and he's shorting NG.

For many other reasons I won't get into here, I'm avoiding all those energy plays, except as short-term trades.

GS raises oil price forcast to $85 (a big change from last year's call for $300) for this year after/before buying a ton of futures and JPM is reported to have tanker(s) on lease storing their cache.

With big boys like this manipulating this stuff, I'm far away from all of it.

I won't call them crooks. That's up to you, as they use our tax money to screw us again.

On a more normal note, go here

seekingalpha.com/autho...

for some interesting (but older) technical discussion of the issues raised in comments above, including depletions.

HardToLove.

Jun 05 11:32 AM

[376602:]

Good post, Long term Buy and Hold: OPEX costs are such that less than 20% of Barnett shale wells are economic at $7/MCF. The Haynesville history is too short. The outlook in Washington is more predictable, no deduction for geology and geophysics vut deductions remain the same for legal and engineering; repeal of the depletion allowance on O&G but not timber, copper, or coal.
US Rep. DeGuette and Pollis introduced legislation today to regulate hydraulic fracturing, since the EPA has lost to the States regulators in the Courts. The states have the engineers and legal experts. The EPA shadow Bureaucracy at a critical moment in the green-shoots recovery will take 3-years to staff, write, review and post its regulations for "fracking" and could use its new authority to suspend drilling. It's a 50:50 bet.

The Administration has yet to take up the Pickens Plan to use Natural Gas and convert national Truck Transportation Fleets. There is yet no prospect for major real growth in demand for natural gas on the horizon. Natural Gas is no more Green than clean coal in some minds.

Politicians and their young man at Treasury are serving up herbicides and saying its California Kool-Aid.

Jun 05 03:12 PM