Oil & Gas Sector: Major Players

Major Players in the Oil & Gas Sector

Major oil shale plays in U.S. include Eagle Ford shale, Bakken shale and the Permian Basin. Continental Resources (CLR) and EOG Resources (EOG) are the primary players in the Bakken shale (Williston Basin/Three Forks and Sanish formations), EOG Resources (EOG) in the Eagle Ford shale and Pioneer Natural Resources (PXD) in the Permian Basin (Spraberry/Wolfcamp formations). Efficient horizontal drilling techniques employed by these Exploration and Production companies is helping them unlock vast oil reserves from these shale formations and driving their massive growth (e.g. 39% 4-Year CAGR for EOG Resources from 2011–2014E[1]) in the last few years. 

The picture below shows how EOG Resources is way ahead of others in some of the major shale plays.

                                                            Source: http://www.eogresources.com/investors/slides/InvPres_0414.pdf

U.S. based refiners - I like some of the players including Phillips 66 (PSX), Valero Energy (VLO) and Holly-Frontier (HFC) which are my favorite names because of their major refining capacity locations around the Gulf coast for Valero and mid-continent for Holly Frontier. Recent pipeline capacity and railroad expansion to southern Gulf coast is also helping transport crude easily from the major manufacturing shale regions deeper in the country to the refineries at the coast and helping relieve some of the glut from the major oil storage hub at Cushing, OK. Higher differential or spread between Brent -WTI (West Texas Intermediate) crude or Brent – LLS (Louisiana Light sweet) crude will help to boost the margins for the refiners for whom the cost of raw crude is tied to the lower U.S. mid-continent crude prices while their refined end product is sold at higher international Brent prices. The reason for the higher spread include global macroeconomic factors including tensions around Russian oil supply to Europe, domestic issues in Africa, higher demand from China, Japan and rest of Asia, etc. which would keep the international benchmark of Brent crude prices higher. At the same time higher inventory and supply of oil from the major shale plays would keep the WTI prices suppressed.

I see a lot of M&A potential as well in the U.S. based shale oil plays where some of the big Asian (e.g. CNOOC China, etc.) or European players (e.g. Total SA, Royal Dutch Shell, etc.) can easily scoop up some of the U.S. based players having a big foothold in the major shale regions, e.g. Statoil’s purchase of Brigham Exploration (BEXP) in the Bakken shale. The names which I like in this regard (potential M&A targets) include the mid-cap E&P names like Oasis Petroleum (OAS) and Whiting Petroleum (WLL) in the Bakken, Gulfport Energy (GPOR) in the Utica shale and Permian Basin (through ownership in Diamondback Energy) because of consistent execution and growth potential.

The picture below depicts the geological landscape of the Permian Basin. 

Source: Tom Fowler, Second Life for an Old Oil Field, Wall Street Journal, Nov 19, 2013.

[1]http://www.eogresources.com/investors/slides/InvPres_0314.pdf