Wednesday, September 3, 2014
In April, I told you about the "shift" taking place in U.S. oil production.
In short, over the past few years, oil production has been dropping in some of the top U.S. oil-producing areas – like the Gulf of Mexico, Alaska, and California. These areas used to produce nearly half of all U.S. oil. Today, they produce less than one-third.
Meanwhile, crude-oil production in Texas and North Dakota has been steadily increasing – thanks to new technologies like fracking and horizontal drilling that allow the U.S. to tap into incredible oil and gas reserves in shale areas.
Because of this technology, West Texas' Permian Basin is now America's largest oil-producing area. But the region still holds enormous potential for producers and investors...
Longtime Growth Stock Wire readers know about the Permian Basin. Located in West Texas, it runs about 300 miles long and 250 miles wide. Because of the large oil and gas reserves in the region, some of the biggest oil producers in the world have set up shop in the area over the past few years.
And in 2013, oil production from the Permian Basin exceeded oil production from the Gulf of Mexico – making the Permian the largest oil-producing region in the U.S.
And production is still growing.
According to the Energy Information Administration (EIA), the Permian Basin will produce 1.72 million barrels of oil per day in September. For comparison, the Permian Basin produced just 1.29 million barrels of oil per day last October. That's a 33% increase in a year.
Part of the reason for the increase comes from an increase in the number of rigs drilling for oil in the Permian. But more importantly, production from each new well drilled has risen for the past few years. In 2011, the average new well produced about 100 barrels of oil per day. Today, each new well produces 165 barrels per day.
So, in addition to having more rigs in operation, each new well is yielding 65% more oil than it was three years ago. And the soaring production shows no sign of stopping.
Because the process of extracting oil from shale is just a few years old, we don't know the limits of shale yet. While many producers in the area have already seen their production – and share prices – soar, there's still plenty of upside potential. As my colleague Matt Badiali told you in June, oil companies in the area are continuing to find innovative ways to extract oil and gas more efficiently. So companies with lots of assets in the Permian Basin will continue to increase in value.
The table below shows the three largest producers in the area. It also shows their annual sales and their total enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) – a valuation metric.
We hold Apache Corp. in the S&A Resource Report portfolio. The company has re-focused its production efforts on North America by recently selling assets in the Gulf of Mexico, Canada, Argentina, and Egypt. Meanwhile, Apache's production in the Permian has increased for 14 quarters in a row. The stock is up more than 40% in the past two years, but it's still cheaper than its peers with a total enterprise value-to-EBITDA of 4.7.
If you're not already invested in the U.S. shale-oil boom, I recommend looking into Apache Corp. today. As production in the Permian Basin continues to increase, so will Apache's share price.
Find more of our latest research on the U.S. energy boom – and how to invest – here:
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