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Workers flush out water during a fracking operation at a natural gas well in Pleasant Valley, Pa. The procedure helps release natural gas from the rock layers by cracking the shale and sandstone formations using water and sand under intense pressure, allowing the captured gas to seep out. (Robert Nickelsberg/Getty Images)
Workers flush out water during a fracking operation at a natural gas well in Pleasant Valley, Pa. The procedure helps release natural gas from the rock layers by cracking the shale and sandstone formations using water and sand under intense pressure, allowing the captured gas to seep out. (Robert Nickelsberg/Getty Images)

TheStreet

Shale oil's promising future Add to ...

Two important pieces recently appeared to increase the enormous interest being generated in shale oil – one a research report from Morgan Stanley and an in-depth piece by the New York Times. Both pieces point investors in one common direction – towards onshore drilling and lots of it being initiated in the next two years, and the stocks of oil services companies.

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Shale has been very big in the energy news for the past several years, but mostly surrounding shale gas. New techniques to the very old technology of hydraulic fracturing have unlocked incredible reserves of natural gas thought unreachable even five years ago. The increase in retrievable gas from shale formations in the Haynesville, Barnett, Marcellus and other areas have been the major reason why natural gas prices have hovered at close to $4 per million British Thermal Unit for the last few years.

But acceleration in technologies unlocking natural gas from shale has had another derivative effect: It has also uncovered new resources for crude oil in shale thought to be also entirely irretrievable even two years ago. Oil companies are virtually falling all over themselves to drill new wells in the-formerly-thought-to-be barren fields of the Bakken in the Dakotas, the Permian basin in West Texas and in the Eagle Ford region in Central Texas, the subject of the NY Times article.

The reason for this is obvious: While natural gas hovers near multi-year lows, crude oil has exploded – still trading over $100 (U.S.) a barrel in the West Texas Intermediate contract and over $115 a barrel in the Brent contract. At those lofty numbers, shale oil is incredibly profitable.

And profits alone are not the only reason for rushing to shale oil using fracking technologies. With 3,000 new wells expected to be drilled in the next 12 months, there is the expectation of 2 million new jobs that could be created and a further hope that oil from shale will significantly increase our domestic oil supply.

It’s a drilling home run: more jobs, decreased reliance on foreign oil and technological advances that portend to bring the break-even costs per barrel down from the $60 where it hovers now. Of course, no amount of money could have generated these barrels even a short time ago. With the United States the global leader in shale oil reserves totaling perhaps a billion barrels, it’s full steam ahead.

Or is it? Many environmentalists still see hurdles to overcome and are less comforted by industry reports that hydraulic fracturing techniques, while already safe, continue to improve all the time. A recent series of articles from The New York Times outlined the scariest fracking threats including the waste water created and the disposal of spent chemical fluids used in the process. In many areas of the country, particularly in the Eagle Ford and Permian basin of Texas, just obtaining the vast quantities of water needed for hydraulic fracturing operations can be the limiting factor.

These are, however, surmountable hurdles and the costs of operations are likely, if not guaranteed, to continue to drop.

The easiest and most agnostic play for oil shale is in the drillers – the oil services companies that specialize in land-based operations and have exposure to pressure pumping services. These companies include the two biggest, Schlumberger and Halliburton and third sister Baker Hughes . Of these three, I much prefer the up-and-growing Baker Hughes, just ready to fully integrate their BJ Services buyout of early last year and ready for the coming surge. Also Weatherford is by far the cheapest of the group and represents the best objective value, while it is also the riskiest play.

Rig counts still haven’t yet approached 2008 highs and day rates are still historically very cheap. The sector has recently been beaten up, but the oil services now look to have great value. Jump in.

Dan Dicker is a senior contributor to TheStreet and has been a floor trader at the New York Mercantile Exchange with more than 20 years’ experience. He is a licensed commodities trade adviser.

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