In November 2012, the International Energy Agency said that the United States would surpass Saudi Arabia and Russia as the world’s top oil producer by 2017. Two months ago, the agency bumped-up the time frame for the U.S. to become the world’s biggest oil producer to 2015. “The extraordinary rise of light tight oil in the United States will play a major role in meeting global demand growth over the next decade,” the IEA said it its World Energy Outlook 2013 report.
Once only a jaw-dropping notion that the U.S. could become energy independent, the shale boom in the States has validated the newfound contention that the U.S. can indeed become oil independent and is serving as a catalyst to reshape the global energy landscape. The U.S. has now cut crude imports by more than 33 percent in the past three years as the nation’s oil output has surged near three-decade highs.
Rigs running at full speed to extract the black gold and natural gas helped to shrink the U.S. trade deficit in November to its lowest level in four years. The Commerce Department reported that the trade gap contracted by 12.9 percent from October to $34.3 billion, beating economist predictions and marking the smallest shortfall since October 2009. Petroleum exports were at a record high for the month as the petroleum deficit ($15.2 billion) shrunk to its lowest level since May 2009, sparking optimism that gross domestic product grew more in the fourth quarter than originally forecast.
Going forward, crude oil exports may actually see an additional surge If the Obama administration loosens outdated restrictions on exports that have been in place since the oil embargo about 40 years ago.
The oil revolution in the U.S. has been driven by technological advancements in horizontal drilling, hydraulic fracturing and seismic imaging that are providing energy companies economically-feasible processes to identify and extract oil trapped beneath the earth’s surface. All of this bodes very well for companies big and small in the U.S. energy sector, whether focused on the acclaimed shale plays or not. Wall Street has already hopped on board, lending to a stark rise in valuations, but there is still a lot more to give in the coming years.
Diamondback Energy (NASDAQ: FANG), a spin-off of Gulfport Energy (NASDAQ: GPOR), has been an investor favorite since it went public in October 2012 due to its strong position in the Permian Basin, the second-largest oil field in world, outside of a massive oil pool in Saudi Arabia. Shares sold at $17.50 during Diamondback’s IPO seem like a steal now, with the stock price climbing as high as $58.71 in November and still holding in the area of $50 today. In 2013, the company was one of the best oil and gas performers, gaining about 180 percent.
Diamondback shifted towards primarily horizontal drilling on its 65,000 net acres in West Texas, spending about $350 million to drill around 40 horizontal wells in 2013. For 2014, the company has boosted its capital expenditure guidance by 50 percent to a range of $425 million to $475 million as it seeks to drill up to 75 horizontal wells and 25 vertical wells. At this point, there’s little reason to believe that the additional cap ex won’t bear fruit again for Diamondback as it has been increasing daily production at a breakneck pace in recent years. Production is expected to rise 100 percent in 2014 compared to 2013 to average between 15.0 MBoe/d and 16.0 MBoe/d.
Research analysts are still bullish Diamondback, with the likes of Roth Capital, Brean Capital, Credit Suisse and Canaccord Genuity all initiating coverage with (or reiterating) a buy rating in the past three months. If there is some caution to be exercised, it is with regards to the company closing in on some analyst price targets and Diamondback trading at a P/E ratio of 62.5. Other energy plays, such as a seasoned major like Haliburton (NYSE: HAL) are sporting a P/E ratio around 20 or lower and even fellow growth play like Kodiak Oil & Gas (NYSE: KOG) – with a similar market cap – is trading with a P/E ratio of 23.
On the point of Kodiak, the company had a volatile 2013, initially losing more than 20 percent of its value in the first five months of the year to lows of $7.27 before finding its groove to nearly double from those levels in October. A downward swing late in the year positions the company at the start of 2014 to advance again and continue a long-term uptrend dating back to 2009.
The company’s board recently approved a 2014 cap ex budget of $940 million, a decline of 6 percent from the 2103 budget, for activities at the company’s Williston Basin assets in North Dakota, where it controls more than 190,000 net acres. The program is expected to result in a 45-percent improvement in production volumes as it expects drilling and completion of roughly 100 net wells. Kodiak said it expects to average 42,000 to 44,000 barrels of oil equivalent per day. The 45-percent growth is impressive; especially considering it comes following the company boosting production at a 180 percent CAGR since 2010.
Investors will be interested to see how Kodiak performed in the fourth quarter in the face of unseasonable harsh weather conditions in December. Through the first nine months of 2013, oil and gas sales climbed to $638.1 million, a 130-percent improvement from the same period in 2012. Adjusted EBITDA for the period was $469.6 million, up from $210.5 million in 2012.
The company reducing expenses, increasing production and, importantly, funding most of its cap ex budget through operating cash flow, mitigates risk and situates the company to move towards an analyst mean price target of $14.70 (20 brokers, low $12, high $19), which is about 35 percent above current levels.
For the speculative investor, New Western Energy Corp. (OTCQB: NWTR) is certainly worthy of consideration. The company has built a formidable portfolio of 20 oil and gas projects, comprised of 11 in Oklahoma, 7 in Kansas, 1 in Texas and 1 in Pennsylvania, with potential reserves in excess of 30 million barrels of oil. Presently, New Western has over 7,000 acres under lease, which contain 168 wells, a couple of which are already in production.
2013 was a year of substantial infrastructure improvements on New Western projects. The work included road completions, site and electrical system upgrades, piping extensions and rework of wells, to name just a few renovations in Oklahoma as the company focuses on bringing existing wells back into production in the Bartlesville Sand formation.
To the north, additional pay zones were opened on existing gas wells in the Fredonia Prospect in southeastern Kansas, resulting in a 100-percent increase in gas production at the Farwell project. Revenue for New Western totaled only $37,876 in the third quarter, but the company tapping into recoverable reserves at Fredonia estimated at 1.19 MCF could provide a significant boon to sales in the future.
The company also strengthened its balance sheet by completing two private placements for gross proceeds of $2.7 million in November, giving it capital for development and production goals in 2014.
Further, the company penned a non-binding Letter of Intent earlier this month to acquire Legend Oil and Gas Ltd. (OTCQB: LOGL) through a share exchange, which will expand New Western’s presence in Kansas, as well as creating a footprint in Western Canada. The deal values Legend at approximately $9.3 million. Legend currently has a total of eight properties in Alberta and British Columbia that are presently producing an aggregate of 117 barrels of oil equivalent per day.
In Kansas, Legend has the Piqua Project and McCune Project. Piqua, a 1,040-acre property, is presently producing an average 18 BOPD from 44 active wells and drilling on the mostly undeveloped Pat Collins lease has initial production rates at wells averaging 2 BOPD. Legend acquired the McCune property, which is producing 7 BOPD, in November for $250,000 in cash and $100,000 in LOGL stock, equating to a price of only $50,000 per flowing barrel of oil.
On January 7, the day the acquisition news was released, Zacks reiterated its outperform rating for New Western Energy and a $2 price target. From current prices at 18 cents per share, even a rise to half of the target would deliver a tremendous return. Given its considerable holdings, it is certainly arguable that Zacks is on point in saying that New Western Energy is undervalued at its current market cap of only $12.4 million, without giving regard to potentially acquiring the assets of Legend Oil and Gas.
America’s energy renaissance is just starting to hit its stride, creating a tectonic shift in world energy markets and providing investors with an opportunity that will only come along once in a lifetime. Whether investors like to trade exclusive in the blue chips or delve into small and microcaps as part of a diversified portfolio, there are companies worthy of due diligence around every corner. Take the time to explore.
About New Western Energy Corp.
New Western Energy Corp. is an independent energy company engaged in the acquisition, development, production, and exploration of oil, gas and minerals primarily in North America. To learn more about the Company, visit: www.newwesternenergy.com.
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