The fracking boom in America may be occurring across an ocean, but its still possible for investors in Birmingham or Yorkshire to take advantage of the shale oil revolution. 88 Energy (LSE: 88E) and Pantheon Resources (LSE: PANR) are two London-listed companies dreaming of becoming the next Marathon or Anadarko.
AIM-listed 88 Energy has dominated the headlines since January as shares exploded in value over 450% after the company's first exploratory drills struck black gold. 88 may have begun life as an Australian oil driller, but after failing in the Outback it has shifted focus towards slightly colder Alaska.
While the company's cold-sensitive workers may not have preferred this move, it has paid off for shareholders so far. Over the past years management has gone out on a limb and purchased roughly 200k acres of Alaskan tundra in the hope that the hydrocarbons underneath would be commercially exploitable. It was never in doubt that Alaska was oil rich, as oil majors have been snooping around the state for years, but only recently has 88 Energy sunk successful test wells in mainland Alaska.
However, while major oil reserves undoubtedly lie under 88 Energy's acreage, the company is years away from being able to exploit these resources. The company has years of work ahead of it before its current exploratory wells produce significant quantities of crude. Furthermore, with limited cash on hand it will be forced to tap shareholders for further equity or turn to the debt markets to begin production.
And, even if production does begin, management is aiming for breakeven prices of $55/bbl for shale oil and $35/bbl for conventional oil, neither of which are particularly cheap for small producers. Due to its low capital reserves, uncertain prospects and years of work ahead of it, I would avoid shares of 88 Energy for the time being.
Lower breakeven price
Pantheon Resources may not be as well known as 88 Energy, but the Texas-focused driller has at least proven its ability to drill several exploratory wells. Pantheon also has the added advantage of concentrating on East Texas, a much more hospitable area with lower costs and a history of shale oil drilling.
Although 88 Energy's projected costs of $35 to $55/bbl may be cheap compared to oil major's breakeven prices, Pantheon can turn a profit when its oil fetches under $30/bbl. Pantheon's balance sheet is also in much better health, with a full $30m raised in a recent equity placement.
Although analysts are expecting Pantheon to turn a profit by 2017, I remain wary of both of these companies. Each is years away from producing significant quantities of oil and will require raising more cash from shareholders sooner rather than later.
Shale oil wells also deplete quicker than conventional ones, requiring new wells to be built frequently. They also remain controversial with local landowners and are the frequent targets of populist politicians' threats. With all these issues confronting them, I wouldn't advise buying shares of Pantheon or 88 Energy any time soon for risk-averse investors.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.