It's no secret that there's a horizontal oil boom happening in the United States today. What is less appreciated is how unique this boom is to the United States.
There are lots of places in the world that have oil in the ground that horizontal drilling and multi-stage fracturing could exploit. But more is required than just having the oil. The U.S. is unique in that it provides the perfect combination of the ingredients necessary to allow for the horizontal revolution to take off.
Let's tick the boxes on these ingredients. First, the U.S. has the oil in the ground trapped in large quantities in tight/shale oil rocks that horizontal wells and multi-stage fracturing can exploit.
Second, the U.S. already has in place a network of thousands of miles of pipelines that were originally used to develop conventional oil plays.
Third, the U.S. has the thousands of drilling rigs required that are needed to drill these unconventional fields that have low rate wells and require constant drilling.
Fourth, the U.S. has the thousands of skilled energy workers required to accomplish the massive amount of drilling, fracturing and completion work that is required.
Fifth and perhaps most importantly, the United States has a system of land ownership that financially incentivizes landowners to have their land developed.
All of those ingredients coming together have allowed the United States to move quickly and exploit the opportunity created by horizontal drilling and multi-stage fracturing.
Other parts of the world may have the actual oil in the ground, but the lack of the other four ingredients means that reaching that oil is many years away. The pipelines, drilling rigs and staffing will require billions of dollars of investment and years. The complications of not having a system of land ownership similar to the United States may present a permanent problem.
All that being said, there is one other country that also has all of the necessary ingredients. And that is America's neighbor to the north.
If you are interested in investing in tight/shale oil producers, you might want to take a look at some of the Canadian producers. The reason for that is that the Canadian producers offer the same opportunities as their U.S. counterparts, but many of them sell for half the valuation in the market today. One of the best examples of this is Bellatrix Exploration (NYSE: BXE).
Bellatrix offers exposure to three horizontal oil and gas plays. The gas plays are of the "liquids-rich" variety, which means that the economics of the plays are excellent, even in the current world of depressed natural gas prices.
|If Bellatrix were to drill 30 wells per year (last year's pace), that would mean that it would take the company 50 years to exhaust its inventory of currently identified drilling locations.|
Bellatrix might be the best combination of growth and valuation available in the stock market today. Over the past three years, Bellatrix has grown at a rate of 30% annually; it's expected to again increase production by at least 30% and possibly more next year.
Despite this sustained high level of growth, Bellatrix still sports a very conservative valuation. Shares currently trade hands at roughly price-to-cash flow ratio of 3 and $35,000 per flowing barrel. This is a growth stock with a value multiple. Better still, Bellatrix has a conservative balance sheet with current debt to cash flow ratio of 1.0.
The company's inventory of drilling locations is very deep, which means growth for years to come. Currently Bellatrix has identified 600 drilling locations in the Cardium oil play, 400 drilling locations in the Notikewin liquids-rich gas formation and another 600 potential locations in the emerging Duvernay play.
If Bellatrix were to drill 30 wells per year (last year's pace), that would mean that it would take the company 50 years to exhaust its inventory of currently identified drilling locations. That sets the stage for a long run of growth.
To accelerate the realization of that value for shareholders, Bellatrix recently entered into three separate joint ventures on its Cardium and Notikewin acreage. This third-party capital is what could allow the company to double production from a current level of 20,000 barrels of oil equivalent (BOE) a day to 40,000 BOE a day by the end of 2014.
Risks to Consider: Bellatrix has exposure to both oil and natural gas prices. A dip in either commodity would reduce cash flow and slow the rate of growth. The company's Duvernay play is also in the early stages of development, which carries a higher degree of risk.
Action to Take --> Bellatrix offers an extremely compelling combination of high growth and low valuation. Management has committed to keeping a clean balance sheet, which greatly reduces the risk of investing in this company.