Stock picking in the U.S. shale basins

As an oil analyst at SunTrust Robinson Humphrey, it's a given that Neal Dingmann has his eye on energy stocks come rain or shine. But whether you're bullish or bearish on U.S. shale development, it's wise to know which stocks are poised to deliver shareholder value. In this interview with The Energy Report, Dingmann tiptoes through North America's major shale plays (including an interesting hybrid) and points out the cream of the crop.

The Energy Report: Neal, between offshore and shale, is the U.S. on a path to energy independence?

Neal Dingmann: We've been heading in that direction, and the development of technology has really expedited that. I think increased production is a trend that's going to continue. Even the U.S. Energy Information Administration (EIA) said we could become an exporter for some oil products down the road. So I believe we're reaching that goal incrementally and U.S. shale plays have been a deciding factor.

TER: How do the risks and rewards compare for players in shale and offshore, respectively?

ND: With any sort of oil drilling, you always have some risk. Offshore exploration, at least to some degree, carries more exploration risk. When you're onshore in a lot of these shale plays, you're not looking at if you're going to have oil, gas or a dry hole. You're usually just trying to decide if the economics justify the entire drilling program.

TER: Of the companies you cover, which ones are the top picks for their shale production and which ones for their offshore production?

ND: Currently, I continue to be a bit cautious offshore, recommending only a company called W&T Offshore Inc. (WTI:NYSE). WTI is attractive because of its higher-than-average historical well success rate in addition to the cash flow from producing assets in the region. The company also has some attractive Permian assets that make for a nice complement to the offshore blocks.

Onshore, my favorite play is the Utica Shale, in which my top plays are Gulfport Energy Corp. (GPOR:NASDAQ) and Rex Energy Corp. (REXX:NASDAQ). Both companies have highly economic acreage, solid balance sheets and industry-leading production growth. I also like Rex Energy for its likely production upside. Another one of my favorite plays is the Eagle Ford Shale, in which my top plays arePenn Virginia Corp. (PVA:NYSE) and Sanchez Energy Corp. (SN:NYSE). Both have core acreage in the region, improving operating results and experienced management. Another favorite name of mine isMidstates Petroleum Co. Inc. (MPO:NYSE). The company has assets in three solid plays and a management team with a long successful track record. Those are my favorite names at this time.

TER: How does the Utica compare with the Eagle Ford and the Marcellus?

ND: The Utica shares some similarities with the Marcellus and the Eagle Ford. But each of these plays has different commodity windows, and you're just hoping with the economics out there today to have more oil and liquids versus dry gas. Unfortunately, for much of the Utica play, it appears that the oil window does not work as well as it does in the Eagle Ford. However, it seems that both the Utica and Eagle Ford have a higher total percentage of liquids than the Marcellus, on average.

TER: What other shales rank high with you?

ND: We've seen a transformation in the Permian Basin. Exploration and production companies (E&Ps) have been finding new zones in there. So the Permian ranks very high right now. The Bakken is still on the map, though that play is a bit more price sensitive. Today's oil prices can certainly support it, but at lower oil prices, it gets more difficult.

TER: Are there any new shale plays to talk about?

ND: I would say there currently are no meaningful or material new shale plays out there. There are some smaller offshoots of existing plays. You have the Woodbine, near the Eagle Ford, and the so-called Eaglebine, a combination play. But is there a new Utica that has come along? No, not recently. What we're seeing is just progress in the existing plays because technology continues to improve.

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