What to own in the US Shale sector?
The US shale sector has quite a few companies to choose from. I analyzed some of the most relevant on two fronts, valuation and reserves (oil and gas) and arrived at a relative score vs. the sector average. While some stocks are more expensive than others this can be broken down into two factors. A ) the mix between oil and gas and B) proven reserves. Companies with low valuation usually have lower reserve life and or higher exposure to gas, which has export limitations and pricing in the near term. See tables below for comparison and charts.
The 4 top stocks are $PXD $FANG $EOG and Chesapeake .The key assumptions for YE22 are modest volume growth i.e., still low capex, WTI stays above US$90 and the henry hub close to US$4 BTU. I do not expect a significant increase in LNG exports as the sector is close to capacity and fully contracted. Thus, while shale oil producers have more upside medium term the large gas producer could be the big winner’s long term. Berkshires $BRK.B acquisition of Oxy $OXY is a good indication of long-term value creation potential.
The US shale oil & gas sector is a beneficiaries of the EUs desire to reduce or eliminate its dependency on Russian supply. The oil sector in the US and in particular shale or nonconventional producers are slow to increase capacity and have focused on reducing leverage and returning cash to shareholders. The last few years have been disastrous for this sector and companies have been reluctant to grow so far.
The situation has changed on several fronts. The most important is pricing , with oil at over US$100bbl companies are very profitable. However, the Natural Gas segment does not and may not see the same jump in revenue and EBITDA due to capacity contains in LNG (Liquified Natural Gas). Natural gas needs to be frozen i.e., converted to a liquid to make it transportable across oceans. It then needs to be re gasified at the point of consumption. This process requires expensive large-scale infrastructure and time to build.
That’s where the US/EU agreement comes in. By proving a large market for US natural gas, the producers and LNG processing can commit to required investments. And while this will take several years, my view is that an eventual end to the invasion of Ukraine will not alter this decision.
Net Zero – The other important driver of natural gas and LNG is that it’s far less polluting than coal and diesel and a should be part of the energy matrix for a very long time along with renewables and nuclear.