U.S. Independent Oil And Gas Small Caps Accessing China And India Demand

by: The Wall Street Transcript

The global demand for hydrocarbons continues to grow creating upside surprise potential for a number of small independent oil and gas production companies.

In an interview published January 9th, 2012 in the Wall Street Transcipt, Ray Reaves, a 24 year veteran in the oil and gas industry and CEO of Field Point Petroleum Corpoartion (NYSEMKT:FPP) puts it succinctly:

I must say we definitely are living in a global economy. And in terms of supply and demand, you've got a number of countries, in particular China, that are going to increase demand for hydrocarbons. India is going to have an increased demand for hydrocarbons, and in the United States alone, there is a big demand for hydrocarbons. As a matter of fact, the United States uses much more than it produces in terms of oil, and we have to import quite a bit of our oil to meet that demand.

Veteran US oil and gas execs have developed some interesting techniques for satisfying that demand.

S.P. Johnson IV, President and CEO of Carrizo Oil & Gas (NASDAQ:CRZO), has developed a joint venture with the Gas Authority of India:

We announced two different joint ventures. One was with the Gas Authority of India, which is basically a mid-stream company in India that wanted to explore for shale gas primarily in India, and they wanted to start learning about it in the U.S. So we have partnered with them in the Eagle Ford.

They bought a 20% interest in a piece of our Eagle Ford acreage, and they are now our partners there, and we're currently drilling wells and fracking and producing. What it does for us is it not only brought us some capital at an important time, but brought us a partner that's interested in potentially more U.S. deals and also may be a partner in shale gas in India.

Companies with American management and trading on US stock exchanges have also accessed demand for new sources of energy through the application of US drilling and exploration techniques in new geographies.

Michael R. McElwrath is President, Chief Executive Officer and Director at Far East Energy Corporation (FEEC.OB) and was a former policy advisor and Department of Energy offical in the Reagan and Bush administrations. He has developed an interesting China natural gas play, detailed in this recent interview:

And it's why you move from a good project to a potentially world-class project with the Shouyang Block having parameters similar to what we see in the San Juan and the Black Warrior in the U.S. or in many of those large plays that were such an attraction for acquisition activity in 2008 in Australia.

The reason for it is that with gas in high permeability areas being able to flow easily to your well, it allows the wells to maintain production for longer periods of time. You get higher gas recovery rates, you drill a fewer number of wells to produce the same amount of gas and it just all results in superior economics...we're fortunate enough to have this key area in China all to ourselves along with our Chinese partner.

Here are three points that investors should consider with Far East Energy. First, we have one of the few large blocks for coalbed methane exploration available in China. Second, we have 1.25 million acres, of which 400,000 acres appears to have high permeability. And reason number three, we have the only pipeline access among Western companies in China.

The real source of value creation in any small independent oil and gas exploration company is the point at which new wells begin to produce. It can be a dramatic inflection point in any stock price when that moment approaches. Mr. Reaves of Field Point puts it this way in his interview update this week on a November 2011 press release on his companies' New Mexico well:

That release was dated November 14, and we stated that we were down approximately 13,000 feet in total depth. We have now reached total depth on that well, and Cimarex (NYSE:XEC), as you know, is the operator. FieldPoint has approximately 43.75% interest in the well. Cimarex has 37.5% interest in the well, and third parties have the other remaining interest. At this time, we're waiting on completion.

The drilling phase is behind us. We are now in the process of setting tanks, laying equipment on location, preparing for the frack. And I believe it would be an eight- to 12-stage frack. Halliburton (NYSE:HAL) will handle the fracking. Cimarex will oversee that. Once the fracking is complete, which we think will take between 24 and 48 hours, we will flow back the well and we'll announce the results.

Company Ticker Price P/E EV (US$) Yield
Halliburton HAL $35 12.7 33.84 Bln. 1.00%
Cimarex XEC $62 10.0 5.62 Bln. 0.60%
Carrizo Oil & Gas CRZO $28 194.8 1.73 Bln. N/A
Field Point Petroleum FPP $4.64 43.0 $37 Mln. N/A
Far East Energy FEEC.OB $0.25 N/A $72.9 Mln. N/A

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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