TMS: Three letters that investors, and particularly those with a bent for energy, will become very familiar with over the next few years. If you aren’t already aware, TMS stands for Tuscaloosa Marine Shale, a shale oil field in Louisiana and Mississippi. It belongs to the new generation of oil plays, in which technology has advanced to the point where oil that previously could not be extracted now can be by way of the famous (or infamous) hydraulic fracturing, or “fracking.”
I have no intention of getting into any debate here about the desirability or otherwise of fracking based on potential environmental impacts. As a trader I was taught to deal with the most probable outcome, whether it was the most desirable or not. History shows us that when oil is found and a cost effective way of extracting it is devised, it will be extracted, particularly when it is in an area in need of investment. That is by far the most likely outcome here.
If you accept that, then investing in the TMS play makes sense. At least one stock with heavy exposure will likely do this:
This is a 1 year chart for Clayton Williams Energy (CWEI). Clayton Williams has skyrocketed from below $40 to over $144 in just 12 months as the value of their investment in the better known Permian Basin shale oil field became clear. According to some, TMS has the potential to become the next Permian Basin or Bakken (the shale field in North Dakota.)
Technical issues due to the depth at which oil is found and the composition of the formation that holds it have held back the TMS as the Permian Basin and Bakken plays have taken off, but, as drilling methods are developed to meet the challenges, the play’s potential is being released.
There is nothing new or secret about the TMS; several of the major players have already seen their stocks jumping, but Clayton Williams had already risen significantly based on potential at the point one year ago where the above chart commences. What happened in the last 12 months was down to that potential being realized. It is likely that the same will happen before too long to several companies with heavy investments in the TMS. Here are 3 to try.
Encana Corporation (ECA): Encana is a Canadian company, but with around 200,000 net acres in the TMS. Interestingly, in Encana’s estimation those holdings don’t conflict with the company’s strategy of focusing on high margin wells and plays. This gives an indication of how far the technology has come for extraction from this previously problematic formation.
With all of these, if you look at the charts and feel that the value has gone, I would urge you to look again at the chart for Clayton Williams above. You would have felt the same around the end of October last year, but that stock has more than doubled since then as potential has been converted to production.
Encana, with experience in the more mature Canadian shale plays and a history of profitability is well placed to make that transition.
Goodrich Petroleum (GDP): Goodrich Petroleum has been at the forefront of the technical advantages in order to profit from their 300, 000+ net acres in the TMS play. As these have led to successful and relatively low cost wells in the area their stock has jumped. On the announcement of results from their Blades 33 H-1 well (1270 Barrels of Oil Equivalent, or BOE, per day) the stock rose around 50%.
Once again though, as the potential that has caused that jump is fully unlocked, even further growth is likely. Incidentally, part of the reason for that exaggerated reaction was that the reserves released were almost entirely in the more valuable oil, rather than gas.
That said, natural gas from the area is still valuable and in order to profit from that you should consider...
Comstock Resources (CRK): Comstock announced in November that they had acquired 55, 000 acres in the TMS, close to wells that at the time were being drilled. Those wells have since been successful, which makes Comstock’s purchase seem smart. Their stock also jumped on GDP’s news, as you can see.
The main reason for including CRK here, however, is that in addition to a commitment to the TMS they also have a large exposure to natural gas which accounts for 68% of their reserves. Their experience in this area could be invaluable if some of the wells drilled in the play produce a lower percentage of liquid reserves than those drilled so far.
That natural gas exposure introduces a different risk factor as the usually volatile price of gas fluctuates, but if you can stand that fluctuation and look at CRK as more of a hedge against your other two positions, then it makes sense.
Even as the market in general has stalled somewhat since the beginning of the year, US energy stocks as a whole have continued their march on upwards. Even as growth and potential have become dirty words to investors, energy potential remains in vogue. Finding energy investments is therefore attractive, but to maximize return you should be looking at companies with potential yet to be realized.
Given the state of the TMS, firms with investment in that play certainly fit that bill. The three stocks above would give you decent, reasonably diversified exposure and are a good way of playing that particular play.