4 High-Returning Ways to Play the On-Shore Shale Rush

Michael Teague  |

Last week, Goldman Sachs (GS) analysts returned from a trip to North Dakota’s Bakken Shale with a great deal of optimism about the exploration and production in the area.

Bakken is one of the epicenters of the North American shale oil and gas boom, with at least 7.5 million barrels of recoverable reserves. The Goldman analysts were so pleased with what they saw there that they initiated coverage on the stocks of two independent producers, the large-cap Continental Resources (CLR) , and the mid-cap Oasis Petroleum (OAS) , both of whom immediately benefitted from nice jumps in their respective share-prices.

Whether on-shore or off, shale prospects require cutting-edge technology, and especially in the case of off-shore drilling, the risk is very high. The mega-calamity that was the 2010 BP (BP) disaster in the Gulf of Mexico, whose environmental and economic consequences will be felt for years into the future, is (hopefully) the worst case-scenario.

Thankfully for drillers and investors looking for safer, more reliable means of producing returns, there are plenty of shale formations throughout the United States from which to choose. The best-known so far have been not only North Dakota’s Bakken, but also the Marcellus Shale that undergirds the states of New York, Pennsylvania, and Ohio, the Barnett Shale in Texas, both of which are producing lots of oil and gas at the moment. Furthermore, it seems like there’s a new massive shale discovery being made every day, most notably the Monterey formation, a significant amount of which sits inland from the California coast, and is currently suspected of having larger reserves than any of the others mentioned here.

With this in mind, there are currently four interesting on-shore based shale plays for investors interested in independent companies. They were selected by screening for a high price-to-cash ratio (greater than 1), indicating that the company has more than sufficient amount of cash in on hand; a high return-on-equity rate (greater than 20 percent), indicating that the company is using investors’ cash judiciously; and a robust dividend yield rate (greater than 5 percent), which is significant for companies in the basic materials sector, who are not typically considered high-growth, and can thus not usually afford to give such large amounts of cash back to shareholders.

Furthermore, all four have debt-to-equity and long-term debt-to-equity ratios of zero, a highly desirable fundamental quality by any metric.


SandRidge Permian Trust (PER) –
Market-Cap: $746.55 million
Price-per-Share: $14.22
P/C ratio: 213.3
Return on Equity: 24.70 percent
Dividend Yield: 16.46 percent

Founded In Austin, Texas in 2011, SandRidge Permian is a trust that acquires royalty agreements in oil and natural gas prospects in the Andrew's County, Texas's Permian Basin. By the end of last year, the trust had been responsible for the development of at least 3 million barrels of oil. While shares are down nearly 7 percent year-to-date, they have picked up over the last six months, adding 5 percent.


San Juan Basin Royalty Trust (SJT) –
Market-Cap: $745.74 million
Price-per-Share: $16.00
P/C ratio: 191.22
Return on Equity: 143.80 percent
Dividend Yield: 6.75 percent

Founded in 1980 in Forth Worth, Texas, the San Juan Basin trust holds a 75 percent royalty interest in Burlington Resources Oil & Gas LP's leases on properties located in the San Juan Basin in northwestern New Mexico that encompass some 119,000 producing acres in the region via over 1,100 wells. The stock has had an excellent year, adding over 21 percent in 2013.


Delek Logistics Partners, LP (DKL) –
Market-Cap: $734.34 million
Price-per-Share: $30.59
P/C ratio: 26.90
Return on Equity: 46.90 percent
Dividend Yield: 5.17 percent

Founded in 2012 in Brentwood, Tennessee, Delek Logistics is a downstream company involved in the transportation and marketing of its operations in Texas and Arkansas. The company a total of about 1,000 miles of pipeline with a capacity of 1.7 million barraels. The company is less than a year old, but the stock has performed incredibly well in 2013, adding nearly 40 percent to its current price.

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SandRidge Mississippian Trust I (SDT) –
Market-Cap: $370.44 million
Price-per-Share: $13.23
P/C ratio: 246.96
Return on Equity: 28.50 percent
Dividend Yield: 18.44 percent

The SandRidge Mississippian Trust I acquires royalty agreements in oil and gas properties in the US, mostly in the form of wells currently in development throughout the Oklahoma's share of the Mississippian Shale formation. Founded in Austin, Texas, in 2010, the trust has dropped 9 percent on a year-to-date basis, but has gained rallied nearly 10 percent over the past 6 months.



[Image Courtesy of Wikimedia Commons]

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