Huge Potential In This Shale Play

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October 8, 2013 10:38am NASDAQ:PSCE NYSE:XOP

natural-gasSinochem, a Chinese oil company, recently paid $17,000 per acre for a plot in a little-known shale area called the Wolfcamp Shale. Everyone has heard of the Marcellus, Utica and Bakken shale areas, but Wolfcamp is just being developed and


one little company has 152,000 acres and its cost was only $500 per acre.

Do the words “buy out” sound familiar?

The company is Approach Resources Inc.(NASDAQ:AREX). It was formed in 2002 by a group of oil and gas industry veterans, and analysts say even without a buyout offer, based on 2014 earnings estimates, it could run up 50%.

AREX and its Wolfcamp acreage has something no other shale play has: multiple wells at a single drilling site. It is currently drilling at what is called the A and B shelves and will soon drill at what is expected to be the richest level of each well, the C shelf.

Based on oil prices at $85 per barrel and only 1,100 wells drilled, estimates put AREX’s stock price at $42 a share up from its current $25. But AREX says they can drill 2,100 wells.

Despite all the positive estimates, 2,100 wells to be drilled and the incredible profit potential in just the potential sale of its acreage, AREX’s stock price was down 16% this year, all on shorts.

It is currently producing 42% oil, 28% natural gas liquids and 30% natural gas from its wells, and it is expected to ramp up its oil production this year. With oil over $100 per barrel, 2014 looks to be a very profitable year.

This is a small company that has made all the right moves and could be producing oil and gas for a long time. But with a potential profit per acre of around $16,000, why bother with the cost and risk of drilling? A buyout, at least a partial one, is the likely outcome.

by Steve McDonald, Bond Strategist, The Oxford Club

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: SPDR S&P Oil & Gas Explore & Prod. (ETF)(NYSEARCA:XOP), PowerShares S&P SllCp Egy Ptflio(NASDAQ:PSCE), Gulfport Energy Corporation(NASDAQ:GPOR), Oasis Petroleum Inc.(NYSE:OAS)


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