An Amazing Re-Rating in Oil

 | May 21, 2014 | 11:45 AM EDT
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Why do I keep this North American renaissance -- one of my key themes for Get Rich Carefully -- right in front of you? Because this move is one of the most amazing re-ratings I have ever seen. It's based not just on the strength in oil, which seems to have established a price that's very sticky above $100 a barrel even at the discounted West Texas Intermediate price. It's also based on production growth.

For the longest time these stocks -- Cimarex (XEC), EOG Resources (EOG), Pioneer Natural Resources (PXD), Anadarko Petroleum (APC), Continental Resources (CLR), Carrizo (CRZO) and many others that I write and talk about each day -- were regarded as boom-bust affairs. They would rise and fall with every tick of oil.

That's no longer the case. Sure, the rising price of oil is an important tailwind. But far more important is the miraculous production growth that six key shale plays are providing. The Eagle Ford and Permian in Texas, the Bakken in North Dakota, the Utica in Ohio, the Marcellus in Pennsylvania and the Niobrara in Colorado are proving far more bountiful than we thought even two years ago.

Some of that is the result of improved drilling methods. A conventionally drilled oil well costs about $2.5 million a pop. These new horizontal fractured wells are about $7.5 million each. But the oil is running far in excess of what many thought possible, and the depletion is running at a much slower rate than was thought.

When your biggest problem is your inability to pump all the oil or natural gas that you can because of a shortage of pipeline space, then you know this move could last far longer than people expect.

Many of the oil companies are producing staggering rates of year-over-year production growth -- twenty-, thirty- and even forty-percent increases -- particularly those in the Permian and Eagle Ford. That's right, they are giving you software-as-a-service kind of growth except the profits, the actual profits, booked and reported in real earnings per share are extraordinary.

I don't mean to give short shrift to the companies more vested in natural gas. Perhaps because the price of natural gas is -- for right or for wrong -- a world price, the companies that are drilling for the fuel are getting tremendous margins. The companies that are producing condensates, the building blocks for plastic, are also making huge amounts of money.

Right now, my favorites are EOG and Anadarko. I like EOG because it has among the best production growth in the Bakken, Eagle Ford and Permian, especially the prolific Delaware basin. Anadarko appeals to me because it now has removed all litigation overhang that has plagued it for the last few years. That makes it a natural takeover target. I would never recommend a stock on a takeover basis if the fundamentals weren't up to snuff. I think APC should be at $120 per share just on production growth.

These companies aren't reckless wildcatters. Those days are over. They are cautious and methodical but, unlike the cautious and methodical majors, these independents can move the needles with each find. That's what is so amazing about this re-rating: you are getting growth at a reasonable price, the fastest growth and the most reasonable price that you are going to find in the market today.

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