From frac sand producers and ambitious juniors in the prolific Permian Basin, to pioneers in a newly reformed and highly lucrative Mexican oil and gas sector, these companies are set to impress in 2017:
1. Frack Sand Producer Hi Crush Partners
You might have thought that investing in frack sand producers was a bad idea in the aftermath of the mid-2014 oil price crash. You would have been right—at the time. But it would have been a smart investment, even if it looked like most of these companies would go bankrupt in early 2016. Why? Today, the frac sand market is looking particularly strong after oil producers changed things up.
OPEC’s attempts to undermine U.S. shale and regain lost market share hit hard, but not definitively. Now U.S. shale producers have regrouped, and there is a second revolution in the making—this time it’s about efficiency and at its core is frac sand.
We are now in the era of the ‘mega-frac’, as U.S. producers create more fractures in rock to get more oil and gas out. The ‘mega-frac’ requires mega sand to keep the fractures open. Producers are now using more sand, or proppants, per well than anyone ever imagined, bringing the frac sand sub-sector to the forefront of oil and gas investing in a very urgent and dramatic way, particularly benefitting Hi Crush Partners.
Credit Suisse analysts predict that by just 2018, sand volumes used in fracking will surpass the boom levels of 2014. This will make frac sand the “fastest-growing sub-segment” in the oilfield services and equipment market.
While Hi Crush Partners had some balance sheet problems last year, it’s resolved those heading into 2017, with net debut currently at US$169 million after a significant pay down, according to a Forbes report. Now it’s leaner and meaner, and it’s got the major growth catalyst of significant frac sand demand.
2. Permian Basin Mover Parsley Energy (NYSE:PE)
This $7-billion market cap E&P company is exclusively focused on developing and growing what Baron Energy & Resources Fund calls a “superior asset position” in the West Texas Permian Basin. Baron Energy believes the Permian “is and will be the premier basin for the future of global oil growth over the next five years.”
The Permian Basin has emerged more or less as the last man standing for shale drilling in the United States, as low oil prices pushed so many shale regions into unprofitable territory. Drilling in the Permian can still work at sub-$50 oil, and as a result, oil companies are cancelling projects nearly everywhere else and pouring their money into the Permian. And Permian deal-making even when things were really tight last year was impressive. There was even a land rush for acreage here, with companies of all sizes looking for a way to get in.
SM Energy paid nearly $1 billion in August for 25,000 acres in the Permian; Concho Resources threw down $1.6 billion for 40,000 acres; and Parsley Energy agreed to pay $400 million for 11,000 acres this summer. SM Energy paid just shy of $40,000 per acre for its acquisition. In June, QEP Resources forked over about $60,000 per acre, the highest price per acre on record—and double the average paid for acreage back in 2014 – a time when oil prices were sky-high.
In short, the Permian has become the hottest shale basin in the country because it is still profitable at low oil prices and it has plenty of stacked formations so drilling multiplies easily from a single well. This is the most productive of all U.S. shale plays, and Parsley Energy is taking full advantage of it. Baron Energy’s view is that Parsley can grow its debt-adjusted cash flow per share “at a rapid rate that eclipses nearly all its peers”. More specifically, Baron’s sees Parsley growing its debt-adjusted cash flow per share by over 50 percent annually through 2020. That makes for a very fast-growing company.
3. Flotek: Where Oranges Take the Frac Stage
While oil and gas producers focus on aggressively cutting drilling and completion costs, companies like Flotek benefit because it’s helping to extract more oil from hydraulically fractured wells—and that’s what it’s all about today, getting more out of a well while chipping away at drilling costs. Related: Oil Could Rise Further On Stronger Asian Crude Demand
Flotek is a bit of an oddball here because it’s main product is derived from oranges, and it’s had a tough fourth quarter, but it did manage to weather the oil bust better than most. Year-to-date, Flotek’s revenue for its CnF product is up around 18.5 percent, even though well completions in U.S. shale plays are down 48 percent, according to a Forbes report. The difference here is that Flotek is offering something new and unique, which brings us back to the oranges, the primary ingredient in Flotek’s citrus-based frac fluid, part of its patented “Complex nano-Fluid”.
The company’s d-limonene citrus-based extract acts as a solvent added to frac fluids with other surfactants to help separate oil from water so crude can better flow.
It also helps that Flotek has recently moved to cut out the middleman in the sales process, so now it’s lowering its prices to customers and boosting its own balance sheet.
Even Baron Energy thinks Flotek should start trading at a premium to the frac sand companies.
4. Golar LNG: Where U.S. LNG Gets Very Attractive
Just for starters, Asian spot prices for LNG are soaring and U.S. LNG, which took a while to get started off, is now suddenly extremely attractive.
In the first week of January, a total of nine U.S. LNG cargoes hit the waterways, heading for northeast Asia as prices surged, rendering U.S. shipments via the Panama Canal more profitable.
In the past couple of months, Asian spot prices jumped considerably, by 27 percent since mid-November, to $9.20/MMBtu in mid-December. This was the largest monthly rise for Asian LNG since February of 2013. In the first week of January, according to Platts, Asian spot prices were $9.75/MMBtu, compared to $4/MMBtu in April 2016, and with around $5.50/MMBtu in the middle of September last year.
Since the U.S. started exporting LNG in February last year, cargoes out of Sabine Pass had been mostly heading to South America, the Middle East and South Asia, with South America being the top destination. Now we’re adding southeast Asia, and the U.S. has officially become a net exporter of natural gas as of mid-November 2016.
For Golar—a leading global independent owner and operator of LNG transportation ships-- things are looking great. Right now, the stock is trading at around US$24 per share, and the consensus is that this company could also become the leading provider of floating gas liquefaction facilities.
5. First-Mover Momentum in Mexico: International Frontier Resources (TSX:IFR.V)
We’re probably saving the best for last from an investment perspective here, but this junior has major first-mover momentum in a venue that is the biggest thing on the global oil and gas scene right now. Welcome to Mexico: the only place you can get in on the ground floor of a major producer where the discoveries have already been made and its cheap to produce.
Now that Mexico has ended the nearly 80-year-old monopoly that its state-run oil giant had over the country’s vast oil and gas wealth, the rush is on to get a foothold on this playing field—a field where oil defies the depressed market, and where the doors have suddenly been flung wide open to foreign investors.
The U.S. Energy Information Agency (EIA) has jumped on board this super oil express, revising its 2040 forecast for Mexican oil and gas production upwards by a whopping 76 percent. The opportunities in this “new” Mexico are staggering—and the interest by foreign companies backs that up.
International Frontier Resources (IFR) was one of the first movers here, securing the Tecolutla Block in the very first licensing round in a 50/50 joint venture called Tonalli Energia, combining Canadian IFR with Mexican Grupo Idesa. That makes IFR one of the first on the scene, giving this small-cap a very large-cap strategic operating presence. IFR signed its first historic license contract with the Mexican government on 25 August. Now it’s about making history. Related: GreaseBook: Reporting Oil Production Just Became Much Easier
Following intense bidding competition in December for major offshore blocks, Mexico is now preparing for round 2.3 onshore, where we’ll see eight of 14 blocks auctioned off in Veracruz, near Tecolutla, and these blocks will be larger than those that were up for grabs in the previous round, with the average size about 71.4 square miles. In total, we’re looking at four gas and 10 oil fields in Tamaulipas, Nuevo Leon and Veracruz.
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IFR’s Tecolutla Block, or Block 24, is in the Tampico-Misantla Basin, and represents a solid foothold in Mexican onshore oil and gas. It’s been identified by geologists as the ‘Golden Lane Trend’ for a reason; still, it hasn’t seen extensive development in the past 50 years. Now that the doors are open to foreign companies, new technology will pour in and the first-movers will have all the advantage of a known oil bonanza that is virtually untapped. It’s basically what happened in the U.S. with the shale boom, where advanced technology suddenly unlocked vast oil and gas riches almost overnight.
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In this Golden Lane Trend, dinosaur vertical well drilling and simplistic pumping was getting only a tiny percentage of oil out of the ground. Today’s horizontal drilling and various enhanced recovery techniques promise to unlock the true riches of this area, and IFR has it all.
In fact, IFR’s re-evaluation of the field and 3D seismic paints a picture of daily production potential that could exponentially exceed historical peak production here and significantly increase recoverable reserves.
But it gets even better. Development costs in Mexico’s oil patch, according to Deloitte, come in at an average of $23 per barrel. But it gets even better than that: Roughly 60 percent of the country’s production comes from areas that cost around $10-$21/per barrel to develop.
So we’re looking at a company that has gotten a first foothold in a play that not only holds vast untapped treasures, but can be produced at a cost that still turns a profit while simultaneously setting up investors for long-term financial gain when prices rebound. We expect big things from this small-cap in 2017, and we’ll be closely watching their next bidding move.
By James Burgess of Oilprice.com
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