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Is This The Oil Play Of The Century?

Thursday, April 17, 2014 10:00 AM

Every now and again, an opportunity comes along that turns unsuspecting, normal people into overnight millionaires.

Such as are the promises being made with the Cline Shale, located in the Permian Basin in West Texas. It has become one of the most talked-about and buzzworthy energy plays in the last century, let alone the past few years.

Covering an area of over 1 million acres, the Cline Shale could be the largest North American oil play of all time, with the potential to pull 30 billion barrels of oil out of the ground.

For perspective, the Bakken Shale in North Dakota and Montana and the Eagle Ford in South Texas are estimated to contain 4.3 billion and 3 billion barrels of oil, respectively. The Cline is bigger than both combined -- several times over.

The proliferation of methods like fracking has made drilling for commodity reserves much more feasible in the past decade, and there is no shortage of exploration and production companies rushing to the area to stake their claim.

I have had a unique geographical advantage in that I spent the past year and a half in West Texas, feeling firsthand where the Cline Shale shock waves are reverberating through the surrounding towns. I've been privy to both hearsay and facts, and having my ear to the ground has helped me to digest the progress and better form a timetable for the play.

I can say without a doubt that the excitement is growing and is more palpable now than ever.

Home and rent prices are surging in some areas, while other cities are rushing to build out infrastructure for the anticipated influx of workers and related service providers.

Astute readers of StreetAuthority may remember that we covered the play briefly last May, with the primary focus centered on two of the early adopters, Devon (NYSE: DVN) and Apache (NYSE: APA).

So what has transpired since that article was published?

Well, one of the most surprising events is that Devon has all but pulled its operations out of the Cline Shale, predominantly due to "a lot of variability" in production at test sites. While this has tempered expectations for some, supporters of the play say not to be swayed, as larger energy companies have been known to divert their attention from unconventional or unproven plays. Just last year, Royal Dutch Shell (NYSE: RDS) disclosed that it would be pulling out of the fastest-growing formation on the planet, the Eagle Ford.

Apache has continued to make headway in its Cline Shale efforts, announcing late last year that it has managed to reduced its Cline Shale well costs by over $1 million. The company has accomplished this by reducing drilling time and costs.

Although Devon has separated itself from the shale, overall growth in the area has grown impressively, and other companies are reporting record results from their wells. A number of these companies are private, but there are a handful of publicly traded companies making their mark, allowing investors a way to take part in the play themselves.

One such company is Pioneer Natural Resources (NYSE: PXD).

An independent oil and gas company, Pioneer has a very large presence in the Permian Basin, landing in the top 10 in terms of net acreage holdings. The $28.7 billion company continues to see its oil production rise in Texas, pulling out nearly a million barrels in 2012.

Most importantly, Pioneer has been a standout producer in the Cline Shale. Last November, the company announced record results from three test wells in the Permian Basin, pulling out 3,156 barrels in a one day, the highest ever in that area.

PXD soared on the news, and the good results continue to come today. Pioneer continues to up its number of drilling rigs in the area and has earned a "buy" rating from Goldman Sachs. Being smaller and more nimble (than, say, Devon) means that Pioneer isn't suffering from the ill effects of costly international products that larger oil producers are caught in at the moment, allowing it to focus its attention on the Permian.

Risks to Consider: Speculation seems to be ripe surrounding the Cline Shale, and clarity can be hard to come by with varying test results, players entering and exiting the scene, and so on. The effects of the shale will vary from company to company, as the increased supply could likely drop the price of oil.

Action to Take --> With crude oil still hovering north of $100 a barrel, exposure to oil in your portfolio is a prudent move. Rumors and speculation can prop up stock prices, but perform your own due diligence to ensure you are in the right names according to your risk appetite. The Cline Shale is still very much in the beginning stages of its output, but it has the potential to be a huge boon for those investors and companies (like Pioneer) that are getting in on the ground floor.

P.S. Forbes, Barron's and almost every other financial media outlet has failed to pick up on my colleague Dave Forest's discovery of what could be the world's first $1 trillion boomtown situated in the center of massive new oil and gas deposits. Several oil and resource mining companies are poised to make billions from this under-the-radar hotspot, including one that's up 1,500% in the past year. To get access to some of the stock names and ticker symbols that Dave's recommending, follow this link.

Eric Winter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.