A Play on Shale Oil Production

 | Jun 11, 2013 | 4:30 PM EDT  | Comments
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A stunning report on Monday, June 10, from the U.S. Department of Energy: Global shale oil resources are 345 billion barrels. That's more than the 265 barrels of proven reserves in Saudi Arabia. At current consumption, the shale oil reserves equal 10 years of global demand. The same report put natural gas from shale formations at 22,882 trillion cubic feet. That was a 47% increase from the DoE's last estimate.

But the implications of these numbers for investors aren't exactly what they seem; the report estimates "technically recoverable" oil and natural gas. And most of the countries where this shale oil and shale natural gas are located -- Russia and China lead the pack -- don't have the infrastructure of horizontal drilling rigs, fracking aggregates, water supply, and pipelines (especially pipelines) that has made it so relatively easy to go from "technically recoverable" to actual production in the U.S. and Canada.

The DoE report is bullish for the U.S. and Canadian energy boom certainly -- it increased its estimates for oil shale reserves in the U.S. and Canada to 58 billion barrels from 32 billion.

But in the rest of the world, the report is most bullish for oil and natural gas infrastructure providers. Those are the companies that will see money first and where investors can be reasonably certain of how much in sales turn into how much in profits. For producers in most of the world outside the U.S. and Canada, the payoff is further off and a lot more uncertain. The DoE report pointedly doesn't look at the question of how much of this oil and natural gas won't be produced because, after subtracting costs for building out the necessary infrastructure, it simply won't be profitable.

So how do you invest in the build-out of infrastructure for the shale industry in the rest of the world?

Schlumberger (SLB) probably comes to mind. This leader in technologies for seismic mapping and oil reservoir management is a good choice.

Tenaris (TS) probably doesn't come to mind. But this maker of oil country tubular goods, or OCTG, may be an even better choice. Tenaris, headquartered in Luxembourg, is a truly global company, formed through the consolidation of Japanese, Italian, Argentine and Mexican companies. In 2006, the company greatly expanded its presence in the U.S. market with its acquisition of Maverick Tube.

The company makes all kinds of steel pipe for the oil and natural gas industries: drill pipe, pipe casing, oil pipe and more. But what interests me is the company's big presence in what's called premium pipe. These are pipe products designed to operate at high pressures or great depth, in corrosive environments, and with a high degree of stress. In other words, exactly the kind of products needed to produce oil and natural gas from shale.

In 2012, U.S. oil and gas shales accounted for 23% of global premium OCTG consumption. The rest of the world oil and gas shales added up to just 2%. And 49% of Tenaris's sales were in North America in 2012, with another 25% in Latin America.

I expect that the rest-of-world revolution in oil and natural gas from shale production in the coming decade will grow both the consumption of premium OCTG outside the U.S. and Tenaris's sales outside of North America.

The stock trades at 13.6x 2013 earnings per share and pays a 2.9% dividend. The next quarterly earnings report is due in July.

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