One of the biggest unanswered questions facing the market today is whether US shale oil has a bright future. US oil production continues to grow, but the shale industry seems to be in the midst of the unknown due to the global financial and economic squeeze. Let’s take a look at what shale oil is and whether it is an interesting investment to consider in 2019.
What is shale oil?
Shale oil, in fossil fuel production, is an unconventional oil. Processes like thermal dissolution, pyrolysis and hydrogenation are used to extract this oil from shale rock. The output can be used directly as a fuel or upgraded by removing impurities, such as nitrogen and sulfur, and adding hydrogen to meet refinery feedstock specifications. The oil produced is synthetic and is typically used for the same purposes as those derived from crude oil.
As a matter of fact, shale oil was one of the first sources of mineral oil utilised by humans. Its earliest implementation was recorded in Austria and Switzerland in the 14th century. Years later, in 1596, the personal physician of Frederick I, Duke of Württemberg, wrote about the healing properties of shale oil.
During the 1830s, the modern shale oil extraction industry was established in Scotland and France. The oil was used as a lubricant and fuel. Additionally, it served as an alternative for the expensive and scarce whale oil.
During the late 19th century, shale oil extraction plants were launched in the US, Australia and Brazil. Later, South Africa, New Zealand, Switzerland, Sweden, Spain, Estonia and China also joined the game, engaging in oil production. However, the discovery of crude oil in the Middle East brought most of these industries to a decline.
Presently, companies have developed a range of drilling techniques to extract more oil and gas out of oil shales, steadily intensifying each stage of the operation and leading to more production. Higher output has allowed the industry to outpace the infamous decline rates from shale wells.
What are the uses of shale oil?
Prior to World War II, the majority of shale oil was typically upgraded for use as transport fuels. Afterwards, it was utilised as a railroad wood preservative and a raw material for industrial resins, pure chemicals and chemical intermediates. In 2008, it was mainly used as a marine fuel, heating oil and, to a lesser extent, in the production of various chemicals.
Due to the concentration of high-boiling point compounds, shale oil is suitable for the production of middle distillates, such as diesel fuel, jet fuel and kerosene. Additional cracking can create the lighter hydrocarbons used in gasoline.
Shale oil predictions
The volatility in oil prices over the past few years has created plenty of concern for investors, businessmen, global policymakers and national governments. The question of whether there are enough oil reserves to satisfy increasing global demand is a hot topic.
Since 2014, US shale oil has created a boom in domestic crude oil production, with shale oil comprising over a third of the onshore production of oil in 48 states. It drove US oil output from 5.7 million barrels per day in 2011 to a record 12.1 million barrels per day in March 2019.
Many shale oil producers have become more efficient at oil extraction as they have found ways to keep wells open, saving the cost of capping them. The US Energy Information Administration (EIA) expects that the US will become a net exporter by the end of 2019. It also projects that production will increase to 13 million barrels per day in 2020. According to Linda Capuano, EIA Administrator, the US is expected to begin exporting more petroleum and other liquids than it imports in Q4 2019, continuing the upward trend in the foreseeable future.
Oil market volatility makes price predicting difficult. However, the EIA announced some of its estimates earlier this year. It is believed the average price of Brent crude oil will rise to $81.73 per barrel by 2025. By 2030, world demand will drive oil prices up to $92.98 per barrel; by 2040, prices will be set at around $105.16 per barrel. By 2050, the EIA's Annual Energy Outlook predicts oil prices to be $107.94 per barrel, reflecting the stability of shale oil.
However, not everyone believes in shale oil’s bright future. At the beginning of July, Khalid al-Falih, Saudi Arabia’s Energy Minister, said he has no doubt that it will “peak, plateau and then decline like every other basin in history.” Alexander Novak, Russian energy minister, took a similar position by sharing his doubts regarding US shale ability to grow in the medium term.
Some people believe that US shale growth is set to a slowdown in the early 2020s due to a host of financial, logistical and geological factors. Other estimates put shale’s peak at around 2025 or later.
5 US shale oil stocks to invest in this year
As US shale oil stocks are in vogue, both prices and production – particularly in the Permian basin – are rising as a result. While many energy stocks across the board are having a rough year, there are still some shale oil stocks to consider in 2019.
The bidding war for Anadarko Petroleum (APC) between Chevron (CVX) and Occidental Petroleum (OXY) shows that industry majors see value in US shale. That said, there is room for sentiment towards shale to improve further. If it does, these 5 companies with an interest in shale oil deserve to be on your radar.
Diamondback Energy (FANG) is a big Permian player. Valuation looks rather attractive, with cost savings from the acquisitions providing earnings benefits in 2020 and beyond. The combination of higher oil prices, M&A potential and better margins make the company one of the most intriguing mid-sized producers in the region. Its current market capitalisation is over $17.5 billion.
Unlike many of its rivals, Continental Resources (CLR) didn't rush to gain acreage in the Permian and instead kept its focus on North Dakota's Bakken play, leading to the company becoming the largest producer in the region. Recently, it has been aggressive in Oklahoma's SCOOP and STACK shale plays. It presently has a market capitalisation of $14.5 billion.
It might seem like Concho Resources (CXO) hasn’t received as much attention as other similarly-sized shale-related companies. This, in turn, makes it a more attractive target for the majors and, therefore, investors. Last year, it became the Permian's largest producer after finalising its $9.5 billion deal to buy RSP Permian. The company has a market capitalisation of $19.87 billion.
During this year, Cimarex Energy (XEC) hasn’t benefited from renewed shale optimism. However, the $5.41 billion-company posted blowout results in Q4 2018, exceeding all analyst estimates. Besides, in November 2018, the company made a seemingly well-timed deal, acquiring Resolute Energy for $1.6 billion.
Callon Petroleum (CPE) represents an intriguing small-cap performer on Permian growth, with its stock looking rather cheap. The stock has rallied in the past few months, remaining a high-risk/high-reward play. However, the company’s valuation shows there’s more room for upside ahead. Its current market capitalisation is set at $1.23 billion.
However, if you are not ready to invest in shale oil stocks for the long term but still want to try to profit from oil market volatility, you can do so through contracts for difference (CFDs).
How to trade shale oil stocks CFDs
Trading shale oil shares can be rather simple with CFDs. A contract for difference is a type of agreement that is made between an investor and a broker to profit from the price difference between the opening and the closing value of the trade. It offers you an opportunity to go long or short on the market without the need to deal with conventional exchanges, providing greater liquidity and easier execution. It also allows you to trade on margin, offering bigger exposure to the chosen markets.
Moreover, when trading CFDs, you don’t buy the underlying asset itself, but instead, deal with the buying and selling prices of a given financial instrument. However, as CFDs are a leveraged product, gains, as well as losses, are magnified.
Check out Capital.com to learn the latest information and trade shale oil stocks CFDs.