NEW YORK (TheStreet) -- My article Why Shale Is a Ponzi Scheme got a lot of interest. I admit to using that title somewhat loosely as shale oil companies do not at all represent a fraudulent investment.
But I did want to point out the treadmill effects of exploration and production of oil from shale as opposed to virtually every other kind of oil procurement for several very good reasons.
As an investor in shale, it's important to know the very unique risks that shale oil companies must take on as opposed to other, more diversified oil companies. I pointed out in that article how well results in shale are exceedingly front loaded. Almost 80% of the average total amount of production will be seen in the first year, with 50% of that appearing in the first three months.
These fast results tend to generate false enthusiasm over the acreage that is being worked as investors tend to falsely interpolate the early results forward -- and oil companies naturally do little to quench that enthusiasm.
Keeping investors enthusiastic is a big part of the shale oil business as debt is constantly required to continue to develop new wells that will increase production and make up for older wells that are constantly producing less. This treadmill effect has caused several dozen oil companies -- whose acreage is less than prime and whose well results are less than stellar -- to leverage up into ever more risky debt to stay ahead.
These are the companies that are now under so much distress because of the collapse of oil prices.
Oil projects with longer-term outlooks, which can average out returns on six- to 10-year timelines, are less sensitive to temporarily depressed oil prices than shale. The integrated mega-cap oil companies like Exxon (XOM), Chevron (CVX) and BP (BP) that have deep portfolios of these kinds of assets have been less at risk than shale oil companies during oil's downturn.
But just because shale is more risky doesn't mean there aren't quality shale oil companies worth your investment.
Those shale players that have good prime acreage and have conservatively developed wells while keeping tight reins on their debt will be in a terrific position to profit when oil's rebound inevitably comes. Names like EOG Resources (EOG), Cimarex Energy (XEC) and Anadarko (APC) are at little risk of default.
I talk more about shale's similarities to Ponzi schemes with Jill Malandrino in the video above.