The market in unconventional resource development has gone through a “euphoric” first half of 2008, according to UBS, but as share prices have corrected by 28% since then, the brokerage suggests now is a good time to invest in the market.
“[This makes] a very attractive entry point ... for investors looking for exposure to these long-life, low-risk assets,” UBS said in a report released Friday.
The first half of 2008 saw an “unprecedented boom” in unconventional resource development across North America, says the UBS note, with new plays being announced almost on a monthly basis.” However, now is a good time to invest in the North American market as it offers “some of the best balance between risk and reward of any global oil opportunity set.
UBS estimates an average after-tax rate of return of 68% based on $9/Mcfe. Buying into North American companies also offers much less political risk and shorter cycle times than other regions.
In particular, companies with a stake in the Bakken light oil and Haynesville/Lower Bossier gas shales deserve investors' attention. Bakken offers an return rate of 105% at $90 per barrel of oil prices, while Haynesville has an rate of return of 89%. Both sides have good access to infrastructure and are ready to develop.
The unconventional drilling boom has put pressure on gas prices, yet UBS expects natural gas production to increase by almost 9 Bcf/d over the next five years. Natural gas prices should average between $8 and $12/Mcf for the foreseeable future.
Top large-cap Canadian companies to invest in include EnCana Corp (ECA), Nexen Inc. (NXY) and Talisman Energy (TLM). Small- to mid-cap options include Petrobank Energy and Resources Ltd (OTCPK:PBEGF), Crescent Point Energy Trust (CPGCF.PK) and Galleon Energy Inc.(OTC:GLNYF). All have ties to Bakken and Haynesville.
All prices shown in US%.