Fracking Fuels Energy Deals

Foreign firms buy stakes in U.S. drilling companies, and bankers set up shop in Houston

Energy issues have taken center stage this fall, from the widespread power outages in the northeast caused by Hurricane Sandy to the presidential campaign debates about U.S. dependence on foreign oil. Although the topics are mired in controversies, one thing everyone seems to agree on is that the U.S. needs to produce more oil and become more self-sustaining.

"It's fair to say everyone wants energy security, which means reducing reliance on imported oil and gas. The way to do that is by drilling shale deposits that are located all around the country," says Dean Colucci (pictured), president of MLV& Co., a New York-based boutique investment bank. "The technology used to extract oil and gas has gotten a lot better and continues to get better, which makes drilling in the U.S. less risky."

Areas such as the Dakotas, Western Pennsylvania, and Western New York are being drilled horizontally for the first time. "There are more oil and gas resources in the U.S. then what was once thought," adds Colucci. That said, Texas is still where most of the oil companies are located.

Recognizing that working toward energy independence is important to the U.S., companies in the oil and gas sector have been diligently innovating to help find ways for the U.S. to reach its goal. Oil and gas companies have developed a lot of new technology to extracting oil and gas from certain geologic formations an easier proposition. For example, hydraulic fracturing, commonly called "fracking" or "hydrofracking," which creates fractures in rocks by injecting fluid into cracks to force them open, has become more precise and more commonly used. And, while critics of fracking find multiple problems with its use, an assessment by the U.S. Energy Information Administration (EIA) found that there is roughly 750 trillion cubic feet of recoverable shale gas resources in addition to already proven reserves and other known resources, which could meet the U.S. electricity demand for 75 years at current levels of fuel demand.

New technology has allowed companies to drill horizontally into shales, enabling companies to get oil out of rock with much less risk. Historically, when companies drilled for oil and gas, the product they looked for had migrated from the source rock and then got trapped in another formation. Now, thanks to fracking, drillers are able to recover hydrocarbons right from the rock, taking a level of exploration risk out of the equation.

"The improvements made in horizontal drilling and hydrofracking have really revolutionized the oil and gas industry. Virtually every domestic independent E&P company now employs the technologies of horizontal drilling and hydrofracturing, even the little guys. The overall risk profile of oil exploration has changed, because we have shifted to looking for trapped accumulations of hydrocarbons after they migrated out of shales, to capturing the hydrocarbons where they were formed. Because the shales exist over widespread regions, the risk is now more of a technical risk. In other words, will the fracturing break up enough of the rock to recover enough of the oil and/or gas in place to produce a solid economic return? Even with these technical risks there is greater predictability, and this is one reason why the majors, such as Exxon and Conoco Phillips, now have large shale projects in the U.S., and we will continue to see M&A activity in the sector." explains Kim Pacanovsky, a managing director and senior research analyst in the oil and gas sector for MLV.

What's more, the U.S. is way ahead of many other countries in technology developments as they relate to oil production. This has led to a number of foreign firms buying stakes in U.S. drilling companies. In June 2010, Pioneer Natural Resources (NYSE:PXD) signed a joint venture agreement with the U.S. subsidiary of India's Reliance Industries Ltd. (RIL) in a $1.15 billion Eagle Ford Shale deal. Under the agreement, Pioneer sold 45 percent of its interest in Eagle Ford Shale acreage, located in southern Texas, to RIL. The land spans some 212,000 acres.

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Dean Colucci