How Investor's Are Crushing Big Oil

“Did I hear you right? You’re saying that entire states are jealous of you guys?”

The man in the seat next to me started laughing.

We had just left a meeting, jumped into a cab, and were halfway to La Guardia before I realized he wasn’t joking around…

A smirk crossed his face as he replied with confidence, “That’s right, partner. And we don’t need 800 miles of pipeline, either. I wouldn’t put a dime out there if you gave it to me.”

My fellow cab passenger was referring to the Trans Alaska Pipeline, which zigzags across the state’s landscape from Prudhoe Bay to Valdez.

The pipeline system was put into place following the oil crisis of 1973, and completed just before production from the field began flowing in 1977.

“It’s certainly dropping like a stone,” I agreed.

It’s not happenstance that 1989 — the year the Prudhoe field’s production peaked at two million barrels per day — was the last strong year for the state’s crude output.

Since hitting that peak, Alaska’s annual production decline averaged 5.28% for the last 22 years!

That isn’t guesswork; that’s a fact.

It’s no wonder the guy was so reluctant to invest his money there. And I could tell by the way he spoke so lightly about Alaska’s Peak Oil crisis that it was clear where he made his first million…

By the time we reached the airport, I knew exactly where he’ll make his next million.

Of course, that much was evident from the bolo tie wrapped casually around his neck and the Stetson resting on his head. The only thing missing was a saddled horse.

Conversation turned and I asked him why he thought Alaska was so envious of his home state of Texas.

“In our case, Texans are luckier than most. Most states would be happy for just one strong area… Us? I can count on two hands how many shale plays have sprung up in recent years.”

I got the feeling he’s worked on his fair share of drilling rigs as he rattled them off: “… then there’s the Pearsall, a bit of the Haynesville, the Barnett, and of course the Eagle Ford — that’s the one getting the love right now.”

And he was absolutely right. It was Texas’ Barnett shale that kicked off this shale revolution, but for the last two years, the Eagle Ford shale has been being developed at a feverish pitch:

click to enlarge image

Thanks to these new plays, Texas has managed to do what Alaska simply can’t: hold off the decline.

What the cowboy in the cab wasn’t mentioning, however, was the up-and-coming player in the U.S. oil industry. And the one on my mind wasn’t Alaska.

“So what do you think of North Dakota? I asked.

That was the question he must have been dreading. His face showed the slightest hint of disappointment as he was forced to concede the tremendous success North Dakota has had since 2006…

It’s Foolish Not to Invest Now

Although his “Texas Forever” attitude was obvious, my cowboy friend is no fool when it comes to his investments.

In this matter, we’re both on the same page. We even share a similar investment strategy.

You see, neither of us was interested in the oil majors, like Exxon. Those are the very companies that came late to the party — and now they’ll be paying top dollar for a piece of the action.

If there’s any doubt as to whether or not the smaller shale stocks can outperform the world’s largest international oil players, investors may want to rethink their position…

See that green line high above the others?

That’s how just one of my favorite small-time companies has stacked up against the Big Boys.

Think about how that gap will further widen going forward — especially as drilling costs start dropping.

Today, it takes half the time to drill a well in the Bakken it did a year ago…

Until next time,

Keith Kohl
Editor, Energy and Capital