Investing In Small- And Mid-Cap North American Oil Producers

by: Bruce Vanderveen

Light oil is the crème de la creme of crude. Why? You need look no further than your garage. It's simple: Nothing is better than high quality, low sulfur sweet oil for making gasoline.

Automobiles are everyone's favorite mode of transportation. But It's not just developed countries anymore. Newly prosperous Asian countries are quickly building roads. And, predictably, Asians are buying automobiles in droves, rapidly boosting gasoline demand. Think how the U.S. expanded auto ownership in the 1950s.

Chinese auto ownership is currently less than 2% of U.S. ownership. But, Asians can't wait to catch up - and they have plenty of U.S. dollars to do it. Also, don't forget India and Southeast Asia (which have a combined population greater than China.) They are just getting started.

It's not just cars. Travel trailers and RVs – you know, those 5 mpg behemoths – are booming in China. You get the picture.

Asia and Europe, however, have a problem: Most of their oil originates from Russia and the Middle East. Those aging fields produce an increasingly sour product. Making matters worse, some sources of light oil, such as Libya, have been cut off (as I write this Gaddafi appears on his way out.) This is why lower quality Brent sells at a large premium to West Texas Intermediate.

Oil Shale and Resurging North American Light Oil Production

New horizontal and fracking technologies promise to open up vast fields to U.S. light oil production. The Williston Basin (North Dakota, Saskatchewan and Montana's Bakken) and the Western Gulf Basin (South Texas' Eagle Ford.) are in the news now. Other shale formations with light oil promise include Northwest Colorado's Niobrara and Ohio's Utica.

There may be over 500 billion barrels of oil in North Dakota's Bakken shale alone while estimates of recoverable oil in the Eagle Ford run as high as 25 billion barrels. The Bakken has been producing light oil for only 3-4 years. The Eagle Ford is just getting started.

China has noticed. CNOOC (NYSE:CEO), China's state-owned oil company, is paying Chesapeake (NYSE:CHK) for stakes in both the Eagle Ford and Niobrara. Australia's BHP Billiton (NYSE:BHP) is acquiring Eagle Ford pioneer Petrohawk (NYSE:HK).

Estimated recoverable reserves in shale oil are only a small fraction of the oil in place. But here's the kicker: Fracking is new and constantly being improved. Estimated ultimate recovery rates keep going up. No one is sure what the limits are. Maybe someday we will get most of those 500 billion Bakken barrels.

North Dakota is the New Texas

Forget potential, look at what is happening right now - on the ground. I was in Williston, North Dakota, last month. The place is absolutely bonkers - construction everywhere. Trucks roar down rural roads. Motels, even mid-week, with no vacancies. Long lines at retail establishments and gas stations. Oil rigs and storage facilities sprouting all over the prairie.

It is hard to believe that a few years back, due to rural depopulation, some advocated turning the Dakotas into a vast grassland where only buffalo would roam. So much for prognosticators. Fortunately, the buffalo are still thriving.

Cushing Overflowing

The Cushing Oil storage facility, the largest in the U.S., is brimming with oil thanks to Bakken production. Inflow is overwhelming outflow at Cushing. This will change once needed rail and pipeline infrastructure builds out.

North American Small to Mid Cap Light Oil Producers to Consider:

U.S. (Bakken): Whiting Petroleum (NYSE:WLL), Brigham Exploration (BEXP), Northern Oil and Gas (NYSEMKT:NOG) and Kodiac Oil & Gas (NYSE:KOG).

Canadian (Bakken): Crescent Point (CSCTF.PK), PetroBakken (PBKEF.PK) and Legacy Oil and Gas (OTCPK:LEGPF). Crescent Point and Petrobakken pay substantial dividends.

U.S. (Eagle Ford): Some small-cap Eagle Ford producers include Rosetta Resources (NASDAQ:ROSE), Carrizo Oil and Gas (NASDAQ:CRZO) and GeoResources (NASDAQ:GEOI). For a more extensive list of Eagle Ford participants see Michael Fitzsimmons' article.

Why Now May Be an Excellent Time to Buy the Above Stocks

Advantages to owning these stocks include: bargain prices (some are 50% off 52 week highs), stable U.S. and Canadian governments, growing production using new technology, and some have substantial dividends. And last, but not least, you own a stake in a diminishing resource, a resource which goes up in value as the U.S. dollar devalues.

Forget the dips. Thanks to market volatility in recent weeks you can buy on the plunges. Apparent deflationary trends may make waiting even more profitable in the near future.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

Disclosure: I am long BEXP, PBKEF.PK, LEGPF.PK.

Additional disclosure: Considering CRZO.