Shocking Prediction: The 'Second Phase' Of The Oil Boom Could Eclipse The First

By Jody Chudley
December 31, 2013

Five years ago the idea of an oil boom happening in North America was not much more than a dream. 

Today, the U.S. is on pace to overtake Saudi Arabia as the world's top oil producer by the end of the decade.

It isn't as though the oil industry didn't always know that formations such as the Bakken in North Dakota and Eagle Ford in Texas contained lots of oil. Oilmen have been thinking about these plays for decades. 

The problem was that there was just no way of getting that oil out of the ground without losing lots of money

The application of horizontal drilling and multi-stage fracturing (or "fracking") has changed all that and made the renaissance in American oil production front page news. 

What is still to come, and what most investors don't realize, is that the "first phase" of the oil "boom" in America is only recovering a fraction of the oil that it can -- and I predict will --produce in the "second phase," which has already started.

Despite being a true breakthrough, the first phase of horizontal oil production is only expected to recover 2% to 15% of the oil in areas such as the Bakken and Eagle Ford shales. 

That means there will still be an enormous amount of oil left in the ground. 

In the second phase of production, the most innovative companies will get to more of those reserves, and I predict a more profitable wave of the horizontal drilling boom will occur. If that happens, enhanced oil recovery (EOR) methods will turn oil producers into cash flow machines, and make some investors richer.

Why is this second phase of the horizontal boom going to be so profitable?  

Further advances in technology, combined with significantly lower costs of second phase production, could drastically improve profit margins for oil producers.

First, let me talk about the lower costs of producing more oil.

During the primary phase of production, all of the land that contains the oil had to be leased or purchased, roads had to be laid to access drilling sites, pipelines needed to be put in place, well batteries had to be constructed and natural gas processing needed to be paid for.

Now, with the necessary infrastructure in place, that money doesn't have to be spent again. So each incremental barrel of oil produced through EOR is more profitable than the barrels produced under primary production.

The price per barrel of oil sold isn’t going to change, but the cost to produce that incremental oil through EOR  is going to decrease.

Enhanced oil recovery techniques aren't new; they've been around for decades.  It's just that they haven't been applied to the types of reservoirs that are being developed with horizontal drilling, until recently.

Now, there are several companies already using existing technology to innovate in the oil sector. 

My favorite is a Canadian company called Lightstream Resources (OTC: LSTMF) that has found a way to quadruple production from some of its older wells through EOR.

This mid-sized Canadian company is using natural gas injection in its Saskatchewan Bakken play at Creelman to pull more than 200 barrels of oil per day from 5-year-old wells that at this stage of their life should be producing only 50 barrels a day.  

To create this production increase, not a lot of incremental capital has to be spent. The main incremental costs to Lightstream relate to the drilling of injection wells (which paid for themselves through primary production before being converted to an injector) and the natural gas that is being injected (which will eventually be recovered anyway).

On top of lower production costs, Lightstream believes by rolling out natural gas injection across its Bakken land base, it can increase the amount of oil it will recover from its current estimate of 15% to almost 30% of the oil in place.

Given that we are talking about a percentage increase that is being applied to 1.69 billion barrels of oil, the numbers involved are very large. 

To give you an idea of just how large, every 1% increase creates 17 million barrels of additional reserves for Lightstream. And combined with lower "second phase" costs, EOR can double Lightstream's reserves without coming anywhere close to doubling the amount of capital required to extract the oil.

Right now, I believe there is a disconnect between the long term value of Lightstream’s assets and its share price. As you can see in the chart, below, the stock has steadily dropped over the past several years. But that has created what I think is a very profitable opportunity for investors.

Lightstream has significant land positions in virtually all of Canada’s existing and emerging horizontal oil plays. These are assets that are going to reward shareholders for decades to come, not just the next year.

Lighstream currently trades at roughly $70,000 per flowing barrel, which is less than half of some of its oil weighted peers such as Crescent Point Energy and Raging River.

The catalyst to eliminate this undervaluation will likely arrive in 2014 as Lightstream has indicated that it will take significant steps (asset sales) to reduce debt and improve its balance sheet.

As balance sheet concerns ease, the valuation of these assets should start to move towards more appropriate levels.

Risks to consider: If you are long on the producer of a commodity, you are also long on the commodity.  If oil prices drop below $70 per barrel, these horizontal oil plays could see their margins shrink considerably, and that would likely be reflected in lower share prices.

Action to take --> The North American oil business is now a real estate game... companies with the right land packages are set to prosper for years to come.  I recommend buying and holding companies like Lightstream Resources that have locked up huge acreage positions in horizontal oil plays. As the years pass and oil companies learn new tricks, this land is likely going to continuously increase in value.

P.S. -- If you agree with my prediction that the "second phase" of the oil boom will profit investors more than the first -- with stocks like Lightstream -- then you need to see my colleague Andy Obermueller's Shocking Predictions for 2014. He's talking about a new medical device that will diagnose any illness -- any time, anywhere... how a "bizarre" plant from the Midwest (not corn) could end America's dependence on foreign oil... and much more. Get them all in his new report, "The Hottest Investment Opportunities for 2014."