Innovate or Die

During the fall months of 2007, a Fort Worth oil and gas company called Range Resources finally had to reveal an incredibly profitable secret…

The company had a natural gas well in the Marcellus Shale that was producing more than 3 million cubic feet (mcf) of natural gas a day.

That there were a few hundred trillion cubic feet of natural gas trapped in the tight shale rock of the Marcellus formation was never in doubt; geologists had known about it for decades. There were even several wells that had been producing gas for 50 years, though the yields were never enough to get excited about.

But until Range Resources had to reveal its 3 mcf Marcellus gas well, no one had figured out how to make a Marcellus gas well a real moneymaker.

Pennsylvania — where Range’s super-well was drilled — has a law that says oil and gas companies can keep their drilling logs private for five years.

So Range didn’t have to reveal how it had gotten such good results. Even the location of the wells remained secret.

At the time, Range’s head of Appalachian shale production Ray Walker said, “Why would we educate anybody else? The best way to protect shareholders is to keep information close at hand.”

Rival exploration companies didn’t know Range’s secret, but they could make a pretty good guess…

In Texas, drilling logs are public after just 60 days. And so the technique that had allowed Range Resources and others to transform the Barnett Shale into America’s most prolific gas field a few years earlier was public knowledge.

It became clear that Range Resources was using hydraulic fracturing, or fracking, to get such fantastic Marcellus yields…

And so the race to develop the Marcellus shale was on.

It’s the Technology

Five years ago the Marcellus Shale was just a rock formation under the Appalachian Mountains. Today it’s the biggest natural gas field in the world, based on reserves.

Unemployment in rural Pennsylvania is almost unheard of as a direct result of the Marcellus Shale.

The situation is the same across America’s oil and natural gas fields. Railroads and trucks are full to capacity. Hotels and motels are booked. There’s new home construction, more tax revenues, and better salaries.

And it’s not new oil and gas discoveries that are responsible for this growth…

It’s the development of the technology to recover the oil and natural gas that’s creating so much opportunity.

Many of America’s hottest oil and gas fields have only become viable in the last 10 years… I’m talking about the Barnett Shale in Texas, the Haynesville shale in Northern Louisiana, North Dakota’s Bakken.

New drilling techniques are even breathing life into mature fields like the Permian Basin.

You can bet your bottom dollar that companies will continue to improve and refine drilling technology — which will push recoverable reserves higher and costs lower. This is happening right now…

One of our favorite oil stocks is a small $9 beauty working the Bakken Shale Oil field in North Dakota. This company has some of the best land in the Bakken. It also gets some of the best production rates of any company working the Bakken.

And the company is growing incredibly fast: Fourth quarter earnings are expected to be up 1,700% over last year.

Two days ago the company released a drilling and production update, and there are some incredibly bullish statements buried in the “management’s discussion” section of the update that I want to share with you:

As noted earlier, our drilling times have decreased significantly with several wells being drilled in less than 20 days. Since we are completing all of our wells through cemented liners, we have eliminated the completion issues that we experienced earlier in the year.

By drilling multi-well pads and utilizing zipper fracs, we have reduced our completion times.

A “zipper frac” is a very new technique that essentially doubles oil production, with only a slight increase in well completion time. You can search the term on Google, but you won’t find much. It really is groundbreaking stuff.

Then there’s this:

The improved performance is attributed to ongoing advancements in our completion techniques. Since the wells are much shallower than wells drilled in the core of our acreage, and are not in the same pressure regime, we believe we can lower our completed wells costs in this area to $7.5 million per well…

Our current well costs… are approximately $10 million, which is down nearly 15% from well costs earlier this year… we anticipate that these well costs can be further reduced by another 5% in 2013.

This company is telling anyone who will listen that production is moving higher and costs are moving lower.

That means earnings are going to be better than most investors expect.

For the third quarter, this company is averaging 15,885 barrels of oil equivalent a day. (Oil equivalent includes oil, natural gas, and natural gas liquids. For this company, 80% of it is oil.)

By year-end, it will be pumping 27,000 barrels of oil equivalent a day…

By the end of next year it might be 50,000 barrels a day.

There’s no other way to say it: That is incredible growth.

And the thing is this company is already undervalued. Earnings are growing twice as fast as its stock price.

I’ve never been more convinced that a triple-digit gain is coming for a stock than I am with this little Bakken powerhouse. It’s going to make some investors very happy…

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.