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Technological breakthroughs have a way of turning the existing order upside down. Such has been the case with the stunning turnaround of the status of the Oil and Gas industry in the United States.  In less than a decade, the US has overtaken Russia as the world’s top oil producer by some estimates.  The breakthrough was the ability to extract oil and gas trapped in shale rock formations, of which there are many across the US.  The following EIA (Energy Information Agency) map from May of 2011 shows the US shale plays at that time:

The international oil community took notice, accounting for 20% of the $133.7 billion invested in shale plays in the US between 2008 and 2012.

One of those foreign investors was BHP Billiton (BHP) that snapped up US based Petrohawk Energy in 2010 at a price some found exorbitant.  That acquisition came in July 2011, preceded by BHP’s March acquisition of some of the assets of another US player, Chesapeake Energy.

BHP is not the only ASX listed company with assets in US shale plays.  There are a few other big players, but most are juniors.  The following have prospects in the ‘more promising’ shale formations in the US.  Here are 13 ASX stocks in the hunt:

Company (code)

Mkt Cap Share Price  52 Wk % Change Long Term Debt (MRQ) Gearing (MRQ) Current Ratio (MDQ)

BHP Billiton

(BHP)

$201b $37.66 +12% $36b 49% 0.97

Aurora Oil & Gas

(AUT)

$1.5b $3.25 -14%   $660m 129% 1.25

Sundance Energy

(SEA) 

$523m $1.13 +46% $29m 8.9%  1.92

Red Fork Energy

(RFE)

$240m  $0.48 -28% $25m 17% 0.33

Lonestar Resources

(LNR)

$192m $0.275  +38%

   0

(FY 2012) 

0
(FY 2012)
6.16

Sun Resources

(SUR)

$88m $0.36 -54% 0 0 0.64

Strike Energy

(STX) 

$67m $0.095 -54%    $2.6m 5.6% 1.28

Austex Oil

(AOK) 

$61m $0.14  +22%  $4.92m   11.9% 1.32

Challenger Energy

(CEL)

$36m $0.11 +42% 0

(FY 2013)

0

(FY 2013)

1.81

Elk Petroleum

(ELK)

$25m $0.14 -42%    $5.3m 67.7%     1.0

Austin Exploration

(AKK)

$19m $0.011 -63% 0 0  6.85

Incremental Oil

(IOG)

$18m    $0.115  -55%  0  24.3% 0.72

Australian Oil

(AOC)

$7m  $0.09 +58% 0 N/A 0.19

Solimar Energy

(SGY)

$2.4m $0.005 -88%  $5.93m N/A 0.09

                                                                           

In recent days BHP is in the news with plans to sell some of its US shale assets.  The company took a big write down hit as the price of natural gas in the US plummeted with the newly available abundance of supply, and the BHP Bears were quick to say “I told you so.”  If you dig deeper into BHP’s plans for US shale you will learn they are selling assets they consider “non-core” to better fund expansion in the most immediately promising areas.  Deutsche Bank was the only major analyst firm to comment on this move, stating in a 25 October Buy recommendation they noted that the planned asset sales will allow BHP to make the most of production in the Eagle Ford region of Texas.  Australian investors should be looking beyond iron ore to consider BHP’s growth in oil and gas.

The other large cap player in the table is Aurora Oil and Gas (AUT), with headquarters in Perth and in Houston Texas.  This company has been in the lucrative Eagle Ford Shale since 2005 and investors wise enough to climb on for the ride have been well rewarded, beginning in 2009.  Here is a five year chart comparing Aurora and BHP Billiton:

Aurora has interest in more than 80,000 acres in the Eagle Ford with 22,000 acres in the most liquid rich region of the play.  US based Marathon Oil is working the same general area and Aurora has participated with Marathon on multiple wells.  As of March 2013 Aurora ventured off on their own with a 100% acquisition of 2,700 acres now going into operation.  In total, Aurora claims to have more than 300 producing wells in its Eagle Ford holdings.  With a Forward P/E (2014) of 7.22 and a 5 Year Expected P/EG of 0.25, this stock seems to have upside potential.  In an 01 November Buy recommendation JP Morgan claims the market is “undervaluing AUT’s high quality shale liquids and exposure to improving US technology.”

Sundance Energy Australia (SEA) is an analyst favorite, with three Strong Buys and 1 Buy according to Thomson/First Call.  Sundance is headquartered in Denver, Colorado and has been trading on the ASX since 2005.  Over that period the stock price has appreciated 400%.  Here is a ten year chart:

Sundance currently has ongoing operations in the Anadarko Basin in Oklahoma, the Denver Basin in Colorado and Wyoming, the Williston Basin in North Dakota, and the South Texas Basin within the Eagle Ford region.  This is another ASX O&G company with a bright future.  SEA has a Forward P/E (2014) of 9.46; a 5 Year Expected P/EG of 0.18, and EPS and Revenue estimates for FY 2014 more than doubling from 2013,with EPS going from $0.05 per share to $0.13 and revenue exploding from $89.94m to $234.37m.

Redfork Energy (RFE) is yet another ASX listed company with headquarters in the US located in Tulsa Oklahoma.  Redfork has two major projects under development in Oklahoma at Big River and East Oklahoma, which is a natural gas play in low production awaiting the rise in the price of natural gas in the US.  The Big River is the one for Redfork, with 81.25% revenue interest in the project.  The company has two Strong Buys and one Buy from analysts and a Forward P/E of 6.0.  2014 EPS estimates on average expect an increase from $0.07 per share to $0.12 and revenue increasing from $82.64m to $135.47m.  

Lonestar Resources (LNR) came into existence through a complicated merger between Texas based Lonestar and Australia based Amadeus Energy which traded under the code AMU.  The company has assets in key shale basins, including the Barnett and Eagle Ford Shale regions in Texas and the Williston Basin, which includes the Bakken Shale, in Montana.  In the highly prized Eagle Ford Lonestar has three assets.  Lonestar’s share price was in a downward spiral before good news that sent the share price higher (notably, an increased borrowing capacity and positive operation updates from the Eagle Ford projects).  Here is the one year chart:

With a market cap of $77 million Perth based Sun Resources (SUR) classifies as a junior explorer, along with the remaining shares in the table.  Sun has assets in the US and Thailand and while it has no debt, it also has no cash to speak of – $3.5 million as of the most recent quarter.  The stock is currently in a trading halt, its second in the last six months.  The last was followed by the announcement of a $13.5 million private placement. While all juniors struggle with raising operating capital before revenue from production is achieved, those with high quality assets have some advantages.  The first is the potential to sell interests in their holdings to better financed partners who then absorb the brunt of the operating costs.  The second is merger and acquisition possibilities.  

Sun has a partnership with a private company, Petro-Hunt LLC, in one of its Texas projects and with another private company, Amerril Energy in another area.  Sun is still in early drilling and drilling preparation with as yet little information on reserves.  However, oil is in production in two areas.

Strike Energy (STX) shares have taken a beating this year, down close to 60%.  This despite having assets in some of the most sought after regions in the US and in Australia.  Strike has operations in the Cooper Basin here and in the Eagle Ford Shale and the Permian Basin in the US.  In September and October of 2013, Strike reported disappointing results from both its Eagle Ford and Permian Basin projects.  On 29 October the company announced upcoming steps to commercialise its gas assets in the Cooper Basin.  The Cooper Basin project got a $9.2 million dollar boost from a successful private placement for institutional and sophisticated investors completed in August of 2013.  

Shareholders of our next junior, Austex Oil (AOK), had a better year than their compatriots at Strike.  Here is a one year chart comparing the two:

Austex has four projects in Oklahoma and Kansas with working interests ranging from 50% in Ellsworth Kansas to 100% at Snake River Oklahoma with 23 wells in development.  The company has two wells in production in a separate partnership arrangement with US based Range Resources.  On 21 October the company announced a $17.5 million private placement to sophisticated US investors to “fast track” the development at Snake River.  

Although Challenger Energy (CEL) has assets in Australia and the US, it is the South African operation that is generating the most interest amongst investors.  On 25 July 2013, Challenger got a “speeding ticket” from the ASX inquiring as to any material information to account for the share price rising from $0.056 cents to $0.07, intraday.  In the response, management commented that they were aware of “third party press suggesting positive sentiment from the South African Government.”  The share price continued its upward rise.  Here is a one year chart for Challenger:

Challenger’s website proclaims its primary focus is the shale gas play in the Karoo Basin of South Africa.  The company has assets in the Oklahoma and Texas area in the US in the Woodford and Barnett shales.  However, following less than fully satisfactory preliminary drilling tests there Challenger decided to plug the wells and is now considering 3D seismic surveys on the prospects.  

The South African story is very different as investors appear convinced the company will be awarded an exploration license.  The area in question totals about 800,000 acres centred on an already successful well.  Challenger got another ASX price query in September and on 19 October the share price went up around 14%.

Elk Petroleum (ELK) has assets in the Wyoming and Montana regions and is the only company in the table using a slightly different technology called Enhanced Oil Recovery (EOR).  This technology is used to rejuvenate an oil reservoir considered depleted for extraction with conventional drilling.  There are four EOR approaches – gas injection, chemical injection, thermal processes, and other less conventional approaches including fracturing.  Elk is partnering with Texas based independent oil company Denbury Resources.  This would be one for a watch list as the company has yet to go into production but the company does have pipelines and other needed infrastructure in place.

Austin Exploration (AKK) is headquartered in Melbourne with operations in Australia and in the state of Colorado.  In the US Austin’s focus is exclusively on nonconventional shale exploration, controlling about 11,000 acres in Colorado’s productive Niobrara Shale as well as 5,000 acres in the Eagle Ford Shale in Texas.  The company has producing gas wells in the US in Texas, Mississippi, and Kentucky.  Here in Australia Austin is a 50% joint venture partner with Beach Energy (BPT) in an oil and gas license in the Cooper Basin.  Investors, however, seem to be singularly unimpressed as the stock price has been on a continual downward trajectory since the GFC.  Here is the chart:

The final three stocks in the table are there for one reason only – all three of these companies have assets in the state of California.  The Monterey Shale formation extends about 1,700 square miles from the central coast to the San Joaquin Valley.  According to the US EIA (Energy Information Agency) the Monterrey shale is estimated to contain three times the reserves existing in the Bakken and the Eagle Ford formations combined.  According to some experts, that represents 60% of the total shale oil reserves in the entire United States, and is as yet untapped.  The US has its own “Greens” and California has been a hotbed of environmental protection for decades, so between the regulatory environment and the environmental lobby, that oil may never see the light of day.  However, these two high risk stocks are certainly worth watching.

To date, Australian investors remain sidelined about Incremental Oil (IOG) and Solimar Energy (SGY), as you can see from a one year chart comparing the dismal price performance of these two companies:

In sharp contrast, Austin Oil Corporation (AOC) is up almost 60% year over year, outperforming the ASX XEJ Energy Index.  In October Australian Oil and Gas Company Xstate Resources (XST) formed an Area of Mutual Interest (AMI) Agreement with Australian Oil Company to pursue new joint venture opportunities within California.  AOC currently holds a 40% interest in seven producing gas wells. Here is the company’s one year price chart, compared to the XEJ:

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.