A comprehensive study of the economics of shale has determined the nationwide mass of rock-based natural gas deposits has got legs on it that can carry U.S. industry and consumers for another three decades.
“Welcome to the party,” T. Rowe Price portfolio manager Tim Parker (left) told AdvisorOne in an interview. “Because this is something that has pretty wide implications across the whole economy.”
The University of Texas study, released Thursday, was widely reported as vindicating shale gas boosters who long claimed that natural gas could be cost-effectively extracted from the subterranean rock.
To get an investment perspective on what this new era of energy abundance means, AdvisorOne reached out to Parker, who manages the T. Rowe Price New Era Fund (PRNEX), one of the oldest natural resource funds, established in 1969.
According to Parker, technology and economics have combined to create opportunity in shale. The key technological innovations were hydraulic fracturing and horizontal drilling. The former, also known as fracking, involves blasting shale rock with water, sand and chemicals to release gas; the latter is a way to recover an even greater volume of gas.
“If you do vertical, hang a left, go 6,000 feet, fracture that…there’s a lot of gas in there,” Parker says.
Economically, when a glut of natural gas brought the price down to $2 per million British thermal units (BTU) one and two years ago, it was hard for all but the lowest-cost producers to survive.
But natural gas today is priced at about $3.50 per BTU, a short distance from the assumption of the University of Texas study that found shale drilling to be profitable at $4 per BTU.
That makes shale gas an attractive investment, according to Parker, since “supply is flattening out and…gas is at a cyclical low,” meaning that a spike in price over the coming years would enhance investment returns.
So, how to capitalize on a long-term growth trend the university study says won’t plateau till 2040? Parker offers some “rules of the road.”
“First, try to be seasonally aware,” he says. “Natural gas isn’t as strong in spring and fall…People get nervous about falling prices, so that’s usually the best time to buy…Hold your fire for now—wait till spring.
“Second, find a lower-cost producer; if prices stay low you want them to survive.”
Parker cites Range Resources (RRC), a Marcellus shale player, for this low-cost virtue.
“The Marcellus Shale is the biggest story,” he said. “It’s half the size of Pennsylvania. At $3.50, some of these wells are economic. In Haynesville [in Texas and Louisiana], drilling doesn’t make money at $3.50, but it sure does at $4.50.”
Back to Marcellus, Parker says, “my ideal companies have more than one asset, preferably a gas and liquid asset,” referring to companies that develop oil fields as well. “Range would be a good example of that. Gas is unpredictable, and you don’t want to be left holding the bag if winter didn’t show up.”