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How to Trade America's Biggest Energy Trend

By Matt Badiali, editor, S&A Resource Report
Wednesday, July 20, 2011

There are only two unconventional shales in the U.S. that investors need to buy today.
"Unconventional shales" are critical to the country's energy supply. They hold over 3.8 quadrillion cubic feet of natural gas – about 158 years of U.S. gas consumption.
All that gas is trapped in thin, flat layers of rocks, like pages in a book. The rocks require special drilling techniques to yield up the oil and gas inside. With advances in technology, shale gas producers have made millionaires out of early investors.
Here's the thing: This huge new supply of gas has pushed prices down to painful levels for producers in less attractive shales. They're starting to reduce production, which is going to pinch shareholders. Meanwhile, the best shales are booming...
You can see what I'm talking about in Rigdata's Unconventional Drilling Report. Below, is a table showing that the number of well permits declined in almost all the unconventional shales... but numbers are up in two. Take a look:
Unconventional Shale
Change In Permits
(2nd Quarter 2010 to Present)
Barnett Shale
Central Texas
Eagle Ford Shale
Southeast Texas
Fayetteville Shale
Northern Arkansas
Haynesville Shale
Texas / Louisiana
Marcellus Shale
W. Virginia / Penn.
Bakken Shale
North Dakota
Woodford Shale
Central Oklahoma
As you can see, there were significant declines in the Fayetteville, Haynesville, and Marcellus shales.
These shales produce mostly natural gas. At the current "wellhead" price (around $3.93 per thousand cubic feet, or "mcf"), companies can't make any money drilling wells. The economics simply don't work.
But, as I said, there are two shales with significant growth: the Eagle Ford and the Bakken.
The Bakken Shale contains mostly oil. With oil prices in the mid-$90s a barrel, producers there are doing fine. But I'm more interested in the Eagle Ford...
The Eagle Ford contains some oil and a larger portion of "natural gas liquids." Natural gas liquids are the non-methane component... think butane, ethane, propane. They have more energy and utility, so they are more valuable...
Natural gas liquids trade at about $45 per barrel. That's a big discount to crude oil, but it's a lot healthier than natural gas: An equivalent volume of natural gas sells for just $23.
Eagle Ford producer Petrohawk, for example, received $3.83 per mcf of natural gas it produced last quarter. But its total revenue was actually $4.70 per mcf, once you add in the oil and liquids. That's the difference between profit and loss. And that's why the company just got bought out for a 60% premium.
As Growth Stock Wire readers know, I'm a long-term bull on natural gas. But if you're heavy into producers stuck in "dry gas" shales, money may be tight for a while.
Consider moving some cash over to companies that targeted liquid-rich shale like the Eagle Ford. Names here include EOG, Chesapeake Energy, and Pioneer Natural Resources.
Good investing,
Matt Badiali

Further Reading:

"Investors who get in the right companies today could double their money within three years as production ramps up," Matt wrote last November. The three stocks he told readers to keep an eye on are up an average of 52% in just eight months. Click to learn more about Eagle Ford, the largest U.S. oil discovery since Prudhoe Bay.
But those aren't the only profits Matt's readers have made off the Eagle Ford shale. Earlier this year, his subscribers enjoyed a massive return from another one of his oil picks. "As you can see, shares of the company have rocketed up 91% since July 2010," Matt writes. "That's a huge gain in just six months." Read more here: The Ultimate American Real Estate Play... We're Up 91% And Still Surging.

In The Daily Crux
Market Notes
"NGL" trend going strong... Rosetta Resources and Linn Energy surge to fresh all-time highs.
Land drillers touch 52-week highs... Helmerich and Payne, Patterson-UTI, and Pioneer are all up at least 80% in a year.
"Cash Kings" Google and Microsoft jump to three-month highs... Apple hits a new all-time high.
Halliburton breaks out to a new all-time high.
Market Watch
Symbol Price
S&P 500 1326.73 +1.6% +23.9%
Oil (USO) 38.25 +1.8% +11.0%
Gold (GLD) 154.66 -1.2% +33.6%
Silver (SLV) 38.01 -3.7% +120.1%
U.S. Dollar 75.38 +0.5% -8.7%
Euro 1.41 +0.2% +9.4%
Volatility (^VIX) 19.21 -8.3% -26.0%
Gold Stocks (^HUI) 568.71 -1.5% +30.3%
10-Year Yield 2.89 -0.7% -2.4%

World ETFs
Symbol Price
S. Korea (EWY) 65.69 +1.8% +41.0%
S. Africa (EZA) 69.99 +1.1% +28.9%
Canada (EWC) 32.10 +1.6% +27.7%
USA (SPY) 132.73 +1.6% +26.2%
Taiwan (EWT) 14.90 +1.4% +26.1%
Russia (TRF) 21.48 +2.0% +23.8%
Israel (ISL) 17.07 -0.3% +22.2%
Singapore (EWS) 13.82 +1.3% +20.2%
Lat.America (ILF) 49.89 +1.2% +17.4%
Japan (EWJ) 10.66 +1.2% +15.4%
China (FXI) 41.77 +1.4% +9.1%
India (IFN) 30.28 +1.6% +8.9%

Sector ETFs
Symbol Price
Oil Service (OIH) 156.73 +2.5% +54.1%
Internet (HHH) 79.79 +2.7% +51.9%
Basic Mat (IYM) 80.18 +1.6% +46.7%
Retail (PMR) 21.81 +2.4% +39.8%
Consumer Svcs (IYC) 73.68 +2.0% +34.0%
Industrials (IYJ) 68.96 +1.5% +33.0%
Big Tech (QQQQ) 58.85 +2.3% +32.7%
Real Estate (IYR) 61.69 +1.7% +32.0%
Transportation (IYT) 96.43 +1.1% +30.8%
Biotech (PBE) 22.39 +1.9% +30.5%
Media (PBS) 15.04 +2.5% +30.4%
Telecom (IYZ) 24.35 +1.1% +29.8%
Water (PHO) 19.42 +1.8% +28.3%
Software (PSJ) 26.53 +2.8% +26.3%
Health Care (IYH) 73.43 +0.9% +26.0%
Construction (PKB) 13.12 +2.0% +24.7%
Semis (PSI) 15.97 +2.8% +22.2%
Big Pharma (PPH) 70.85 +0.7% +21.6%
Defense (PPA) 19.66 +1.4% +21.4%
Utilities (XLU) 33.33 +0.9% +15.3%
Insurance (PIC) 16.04 +1.4% +14.3%
Financials (IYF) 54.92 +1.2% +9.7%
Nanotech (PXN) 8.72 +1.9% +3.8%
Alt. Energy (PBW) 8.53 +2.3% -3.2%

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