Meet The Shale Oil Play Where Producers Are Receiving $67.50 Per Barrel

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Includes: CVX, RDS.A, RDS.B, XOM, YPF
by: The Next Commodity Boom

Summary

The U.S. shale oil boom turned the energy sector upside-down by creating an oversupply that was worsened by OPEC.

Internationally shale oil and gas have not gained much traction even prior to the oil price collapse.

Argentina's Vaca Muerta shale is emerging as the first real international shale play and surprisingly producers are today receiving $67.50 per barrel for production.

The U.S. shale boom caused the price of oil to crash in late 2014. OPEC ramping up production into an already oversupplied market has kept it down and pushed it down even further.

That has put the shale boom in North America into reverse. The rig count decline has now reached epic proportions.

Source of image: Buiness Insider

Internationally the shale/horizontal boom never got out of first gear. Interestingly though, the one international shale oil play that appears to be the real deal continues to progress even during the oil slump.

That play is the Vaca Muerta located in the South American nation of Argentina.

The Vaca Muerta today is not just the best international shale oil play, it is the single most attractive shale oil play in the world for a producer to spend money drilling wells in.

Selling Oil At A 250% Premium To WTI

Business isn't just tough for oil producers in North America, this is catastrophic. Most shale producers were built for a world of $80 plus per barrel oil. Their balance sheets were not ready for what we are experiencing today and the economics of their plays certainly don't work.

There is no doubt that back in 2014 there were no companies that developed a business plan to deal with sub $30 per barrel WTI oil prices in 2016.

Now they aren't even getting $30 per barrel

Oil in the Bakken hit sub $20 per barrel a while back

Life for companies producing oil in the Vaca Muerta is very different. The price of oil actually allows for drilling economic wells.

For that the producers can thank the Argentian Government. On January 5, 2016 the Argentinian Government set the price for oil sold in Argentina at $67.50 per barrel.

The reason for that is that the Argentinian Government sets a minimum price in order to encourage producers to develop domestic assets.

The view of the Argentinian Government is that oil prices will rebound and they want to keep producers motivated to invest in Argentina in the meantime. The oil and gas business has the potential to drive the economy in Argentina for many years to come.

In most developing countries the Governments have subsidized fuel prices, but in Argentina the motorists are subsidizing the producers.

Very Credible Companies Are Developing The Vaca Muerta

The potential of the Vaca Muerta is demonstrated by the quality of the companies operating in it.

Chevron (NYSE:CVX) agreed to a venture in 2014 with Argentina's YPF SA (NYSE:YPF) which would involve eventually investing $15 billion developing the Vaca Muerta. That investment is expected to result in 1,500 wells and daily production of 50,000 barrels per day of oil and 3 million cubic meters of shale gas.

The biggest non-state owned producer of them all Exxon Mobil (NYSE:XOM) is also bullish on the Vaca Muerta. Through its subsidiary XTO Energy, Exxon has several blocks in both the north and south sections of the play.

Shell (NYSE:RDS.A) recently has acquired a 35 year deal to exploit two Vaca Muerta blocks, a deal that was entered after the price of oil collapse.

To move the needle for the likes of Chevron, Exxon and Shell the potential needs to be very large. In 2013 the EIA estimated that with 27 billion barrels of technically recoverable oil the Vaca Muerta is the fourth largest shale oil play.

You can see why the play has the attention of the big boys.

Source of image: OilPro.com

Implications For Investors

The majors give the Vaca Muerta credibility but they really don't provide much exposure to the play given how small it is relative to their massive operations.

For now energy sector investors should keep their eye on the play and watch how it develops. There are smaller operators with exposure to the play, time is just needed going to be required to allow them to gain some balance sheet size to make them more investable.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.