Fidelity portfolio manager John Dowd is investing in companies that stand to benefit the most from the new shale fields. So far, margins of shale exploration and production companies have been skimpy, he says.
But Dowd argues that the weak showing is about to change because of declining costs. When shale development began several years ago, gas production outfits moved slowly, going through the expensive process of drilling a few individual wells. Gradually the number of wells increased, and producers began running massive operations that could deliver gas more efficiently.
As the facilities expanded, engineers have improved techniques through trial and error. All the efforts will soon result in healthy margins, says Dowd. "When the wells are extremely efficient, then the industry returns can be good," he says.
As an example of an efficient producer, Dowd cites Cabot Oil & Gas (COG - Get Report), a longtime holding of the fund. A leader in exploiting the Marcellus gas fields, Cabot managed to cut its costs sharply and improve profit margins even during times when gas prices were falling. "The productivity of their wells has been improving in virtually every quarter," he says.Dowd also likes EOG Resources (EOG), which produces oil in the Eagle Ford shale region of Texas, and Pioneer Natural Resources (PXD), an oil producer in the Permian Basin of Texas. David Ginther, portfolio manager of Ivy Energy, says that operators of pipelines stand to enjoy growing profits. Pipeline owners charge fixed fees based on the volume of the material they transport. As volume increases in the shale fields, the pipelines should report improved sales and profits. A favorite pipeline holding is MarkWest Energy Partners (MWE), a master limited partnership that yields 5.0%. MarkWest is increasing its facilities in the fast-growing fields of the Marcellus region and the Utica shale fields that extend from New York through Pennsylvania and West Virginia. "The company is in the right areas," says Ginther. At the time of publication, Luxenberg had no positions in securities mentioned. Follow @StanLuxenberg This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.