Shale Gas Stocks

Although we credit Colonel Drake and his Titusville well with the distinction of the birthplace of the U.S. oil industry, the fact is we had been actively drilling for natural gas for more than three decades.

As you know, William Hart's 27-foot natural gas well was drilled in Fredonia, New York, during the 1820s. Now considered the “father of natural gas,” Hart was drilling about 80 miles north of the famous Drake well.

But there's another figure oft forgotten in this story...

It's more likely than not you've never heard of Preston Barmore.

Two years before Drake, Preston was drilling less than a mile away from Hart's gas well.

Even though his well was a little over one hundred feet deep, he decided to drop a small 8 lb. charge of gunpowder down the well to fracture the rock. The explosion marked the first time someone fractured rock in order to increase the flow of gas from the well...

And things haven't been the same for this sector since.

Shale Gas 101

Before running through the various U.S. shale plays, let's be clear as to why we're focusing on shale gas in the first place.

Just how important is shale gas to our overall supply? Well, this should give you a good idea:

shale 2040 1-15

Breaking down the numbers further, we can pinpoint how critical shale gas is to the overall scene (click table to enlarge):

gross withdrawals

Above, you can see production from shale gas wells jumped 327% between 2007 and 2011. Meanwhile, output from non-shale gas wells has tapered off by nearly 20%.

There's a good reason U.S. shale plays are being blamed for the current supply glut: It's the only place production is truly growing. And since 2011, output in plays like the Marcellus has doubled to approximately 7 billion cubic feet per day!

Shale Gas Investing

This new supply couldn't have come at a better time.

We keep getting a glimpse of these small shifts toward natural gas, the most prominent being the move of our power plants from coal to natural gas.

But we're talking about more than just electrical generation here...

Sit up and take notice, because more stories are popping up across the media spectrum every day.

Sometimes it's a short article on a company converting its truck fleet over to CNG — which makes perfect sense for companies like UPS. Prices at the pump can be rather painful when you're running a large truck fleet. The national average of $3.91 per gallon of diesel doesn't come close to the $2 per gallon equivalent that CNG can deliver.

UPS isn't the only company converting its vehicles to run on natural gas. AT&T, for example, plans to purchase 8,000 CNG vehicles this year — and their alternative fuel plan is expected to save about 49 million gallons of gasoline over the next decade.

Natural gas-fueled vehicles are certainly becoming more popular in natural gas-rich areas like the Marcellus. Right now, there are a little more than a dozen natural gas filling stations available for Pennsylvania motorists.

And natural gas is even useful for the companies drilling for it! In fact, Encana has been able to cut its fuel costs nearly in half in the Haynesville by using liquefied natural gas to power its drilling rigs.

It looks like railroads are next up on the list... Canadian National Railway is attempting to make the conversion.

“Are planes next?” you ask. Actually, Qatar has already broken into that territory using jet fuel from a gas-to-liquids process, courtesy of Shell.

This is the road we're heading down — and not getting ahead of this transition will be the single biggest regret investors have decades from now.

U.S. Shale Formations

But it's not enough to simply recognize that natural gas prices are making a comeback, or that major players like ExxonMobil are paying a hefty price for their own piece of the shale profits...

For individual investors, knowing the difference between the various shale formations is critical when separating the good, the bad, and the downright profitable.

The Good, the Bad, and the Downright Profitable

Where to begin?

We can pinpoint the start of the shale boom with a technological breakthrough George Mitchell used to tap the Barnett shale play back in the 1980s...

The Barnett Shale

The formation lies beneath nearly two dozen Texas counties, spanning roughly 5,000 square miles. 

In case you were wondering, this is what started it all...

In short order, the Barnett became the largest onshore natural gas field in the U.S., with an estimated 40 trillion cubic feet in the ground. For the last twenty years, the formation has produced more than 12 trillion cubic feet of natural gas, and today there are over 16,000 gas wells on record in the Barnett.

However, low-price natural gas environment has taken its toll. Below you can see how production declined in 2012 for the first time since 1993, as did the number of drilling permits issued throughout the year (click to enlarge):

Barnett - drilling

Despite hitting new production highs in 2011, the Barnett's success led a rush for companies to develop new shale plays across the lower 48 states — including a shale play sitting over 200 miles directly east of Fort Worth...

The Haynesville Shale

Consisting mostly of sedimentary rock, the Haynesville Shale play is found roughly 10,000 feet below parts of northwestern Louisiana, Arkansas, and Texas' eastern border.

If you had a dime in shale investments back in 2008, you would have made a solid profit on companies drilling in the play. The buzz over the Haynesville rose at a feverish pace.

Output quickly skyrocketed as drillers frantically tried to extract the 60 trillion cubic feet held tightly within the rock... and they were extremely successful.

According to data from the Energy Information Administration, the Haynesville overtook the Barnett as the country's highest-producing shale gas deposit back in March 2011:

Haynesville beats Barnett

Unfortunately, 2013 is shaping up to be a frustrating year for Haynesville operators. It's next to impossible for output to increase after watching drilling activity diminish over the last year.

Louisiana Texas Drilling Rigs 1-17

In the wake of sub-$4 natural gas and crude oil holding steady around $90 per barrel, companies are moving to more liquids-rich targets like the Eagle Ford play in South Texas.

Is that it for the shale gas boom?

Hardly...

The Marcellus Formation

We've been talking about one formation in particular that has the legs to last.

Even though prices are cheap, the Marcellus Shale is still one of the hottest unconventional plays in the U.S. — and that's taking into account the drastic cut in estimated reserves from the EIA.

Back in 2011, the EIA reported the Marcellus held 141 trillion cubic feet of natural gas (slightly higher than the USGS estimate of 84 trillion cubic feet).

This formation stretches across five states, from New York to West Virginia, with the vast majority in Pennsylvania.

marcellus 1-17

Between Pennsylvania and West Virginia, companies produce about 7 billion cubic feet of natural gas per day. At this rate, Marcellus production from these two states is roughly one-quarter of our U.S. shale gas production — and has more than doubled since 2011.

Although drilling activity is also at a two-year low, that won't deter some of the bigger players from spending cash developing their Marcellus assets...

CONSOL Energy is directing two-thirds of its 2013 spending on coal and gas investments on its Marcellus operations.

A 2012 report from Standard & Poor suggested the Marcellus Formation held nearly half of the proven natural gas reserves in the United States.

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