Could This Be the Next Big Shale Play?

U.S. shale gets a lot of attention, but this Alberta play could be the next big thing.

The Motley Fool

Shale drilling has created an investment bonanza south of the border. New techniques like hydraulic fracturing and horizontal drilling have unlocked vast quantities of hydrocarbons from the tightly packed shale. Emerging plays like the Eagle Ford, Bakken, and Marcellus are creating fortunes for investors.

But like venture capitalists hunting for the next Google, the search is on for the next prolific shale play. And some of the smartest names in the energy business are putting their money on the Duvernay.

This could be big

The Duvernay is a 100,000 square kilometre stretch along the Alberta foothills just east of the Rocky Mountains. It’s a proven play, which launched Alberta’s oil and gas industry back in 1948. But technological breakthroughs have breathed new life into the formation and analysts are excited for a few reasons.

First, it’s liquids rich. In particular, the Duvernay is blessed with a large concentration of a super-light oil called condensate. This highly prized hydrocarbon trades at a 10% premium to West Texas Intermediate. At those prices, operators can give away their gas for free – which they almost are – and still make lots of money on liquids production alone.

Second, it’s a great location. The Duvernay is a short drive from the booming oil sands. With bitumen production expected to double over the next decade, the industry is going to need a lot of condensate diluent to ship their output through pipelines.

Finally, it’s big. According to the Energy Resource Conservation Board, the Duvernay holds an estimated 443 trillion cubic feet of gas, 11.3 billion barrels of natural gas liquids, and 61.7 billion barrels of oil. Those are needle moving numbers.

The question is how much of those reserves can be profitably exploited. So far early drilling results have been encouraging. Last week Chevron (NYSE: CVX) announced its initial exploration results. Liquids yield for the completed wells range from 30% to 70% with initial production rates up to 7.5 million cubic feet of natural gas per day and 1,300 barrels of condensate per day. Definitely numbers to suggest that drilling in the Duvernay will make economic sense.

Other operators are also reporting impressive results. Encana (TSX: ECA, NYSE: ECA) plans to spend $600 million in the play this year with 13 wells drilled year to date. One of which produced a highly publicized 1,400 bpd of condensate and 4 mcfd of natural gas after 30 days in operation. Encana’s exploration work is currently centered around trying to find sweet spots in the play and more results are expected to be published later this year.

Other names like Bellatrix Exploration, Talisman and Athabasca Oil own large land positions. But they’re waiting to see the drilling results from rivals before developing their own acreage.

Whoa! Hold your horses

But before investors get too excited, it’s a good time to note that the Duvernay comes with some caveats. That’s because it’s deep and expensive to drill. Well completion costs start at $10 million and go up from there.

That means the Duvernay has to post spectacular numbers to be economic. Investors want to see at least 50 barrels of condensate per million cubic feet of natural gas in order to justify production. Ideally though, that figure should be much higher as long as natural gas prices remain low.

Foolish bottom line

With more drilling results coming later this year, we’ll have a much better sense of the Duvernay’s viability. For cash-strapped juniors, higher values for their drilling rights could be a life-line. And for larger names like Encana and Talisman, the Duvernay could be big enough to get them back into Bay Street’s good books. A lot is riding on this play. And it certainly has the potential to be the next Eagle Ford or Bakken.

The Duvernay has a lot of folks excited, but there is another emerging Canadian energy play that has nothing to do with either oil or gas that could be even more exciting.  Click here now to download our special FREE report “Fuel Your Portfolio With This Energetic Commodity” to get all the details!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Robert Baillieul does not own shares of any companies mentioned.  The Motley Fool has no positions in the stocks mentioned above at this time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

think thought consider
Investing

TSX Stocks Are Still Dirt Cheap! 3 Bargains I’d Buy Today

TSX stocks like Well Health and BlackBerry are digitizing their chosen industries and effectively disrupting the landscape.

Read more »

investment research
Dividend Stocks

Better Buy: Scotiabank or TD Bank Stock?

Take a closer look at Scotiabank and TD Bank stock to determine which might be the better addition to your…

Read more »

retirees and finances
Dividend Stocks

How to Retire in a Bearish Market

Are you looking to retire this year but are skeptical because of the bearish market? Here is a way to…

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Investing

2 Seriously Misunderstood Value Stocks to Snap Up Before the Market Figures Them Out

Jamieson Wellness (TSX:JWEL) and another mid-cap stock are worth consideration for your TFSA.

Read more »

Target. Stand out from the crowd
Dividend Stocks

TFSA Investors: 2 Stocks to Buy if the Market Drops Even More

We still aren't in a recession, so we still haven't seen a market bottom. If these stocks drop even more,…

Read more »

analyze data
Investing

Why Brookfield Asset Management Could Be One of the TSX’s Best Value Stocks

Brookfield Asset Management (TSX:BAM) is a wonderful dividend-growth stock that's hiding in plain sight right now.

Read more »

Woman has an idea
Dividend Stocks

2 Dirt-Cheap Dividend Shares I’d Buy for Long-Term Passive Income

Dirt-cheap dividend stocks should be evaluated more thoroughly than their more stable counterparts for long-term dividend sustainability.

Read more »

stock research, analyze data
Dividend Stocks

3 Oversold Dividend Stocks (With a 7% Yield) I’d Buy Right Now

TSX dividend stocks such as Enbridge and TC Energy offer investors dividend yields of more than 7% in 2023.

Read more »