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Four Favorites in Natural Gas: EOG Resources, Range Resources, Nabors Industries, Baker Hughes

January 26, 2010 | About:
Inoculated Investor

The Stock Advisors

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"Exxon’s big acquisitions often serve as a blueprint for the rest of the industry," says energy sector advisor Elliott Gue, referring to its recent $41 billion acquisition of natural gas producer XTO Energy.

In Personal Finance newsletter, he says, "The landmark deal represents a major bet on the future of natural gas and sets the stage for a raft of similar acquisitions by energy majors in 2010." Here's a look at four favorites in the sector.

"Growth Portfolio bellwether EOG Resources (EOG) already bounced on takeover speculation, but there’s more upside to come.

"Roughly two-thirds of EOG’s production is natural gas, and the company has 153,000 net acres in the Haynesville Shale, one the largest and cheapest-to-produce plays in the US.

"The company is planning to step up its drilling activity in the region in the latter half of 2010. In Canada, EOG has 158,000 acres in the Horn River Basin of British Colombia, an early-stage gas shale play that has shown stellar drilling results.

"But much of EOG’s near-term growth is expected to come from unconventional crude oil plays, fields produced using the same basic fracturing and horizontal techniques used in unconventional gas fields. Like XTO, EOG also holds highly coveted acreage in the Bakken Shale.

"Range Resources (RRC) is a leading player in the red-hot Marcellus Shale; in fact, the company drilled the first commercial well in the play back in 2004. As a first mover, Range has also amassed one of the most extensive acreage positions in area.

"Range plans to double its production from Marcellus to a total of 200 million cubic feet per day by the end of 2010 and 400 million in 2011.

"That’s 40 times what Range was producing from the Marcellus at the end of 2007. Well economics in the Marcellus are among the best of any of the major US shale plays, particularly for wells drilled in its Pennsylvania core.

"Contract driller Nabors Industries (NBR) owns a fleet of primarily land-drilling rigs that it leases to producers in exchange for a daily fee "known as a day-rate.

Unconventional gas fields typically require relatively deep wells with horizontal segments that can extend to more than a mile in length. Drilling such advanced wells requires more modern, powerful rigs than drilling in conventional plays.

"Nabors owns one of the world’s largest fleets of advanced rigs; day-rates for such rigs held up far better amid the early 2009 drilling slowdown than rates for older rigs.

"Nabors also has an extensive international business, making it easier for the company to meet demand from an operator looking to drill unconventional plays outside North America.

"Baker Hughes (BHI) is in the process of acquiring BJ Services in a $6 billion deal. BJ Services is a leading provider of fracturing services in North America and to a lesser extent internationally.

"Meanwhile, Baker Hughes has a strong position in directional drilling and well completion, the process of preparing wells for optimal production. Combined, the two firms can offer a comprehensive suite of services related to unconventional gas production.

"And because of Baker’s existing international presence and marketing operation, the merged firm is in good position to sell these services to operators looking to develop unconventional fields abroad."

The Stock Advisors

http://www.thestockadvisors.com

About the author:

The Stock Advisors

My name is Ben C. and I am 2nd year MBA candidate at the Anderson School of Business at the University of California- Los Angeles. I have a BS in Economics from the Wharton School of Business at the University of Pennsylvania. Before coming to Anderson I worked as a generalist equity research analyst for Right Wall Capital, a long-short equity hedge fund located in New York City. Prior to working at Right Wall I worked as an analyst at Blue Ram Capital, another long-short equity hedge fund located in Rye Brook, NY. This past summer, I worked for West Coast Asset Management as a research analyst. West Coast, which was co-founded by Kinko’s founder Paul Orfalea, is run by well-known value investors Lance Helfert and Atticus Lowe.



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