Home-Grown Oil Stock Picks

Amid sky-high oil prices, some innovative oil producers have found ways to produce more oil back home in the United States and Canada. While major oil companies are scrambling across the globe through politically tough waters to develop foreign oil fields, these home-grown oil producers are using new recovery methods and plain hard work to boost much-needed domestic oil production.

Higher oil prices may have opened the door to pay for new, costlier oil-recovery methods, but firms such as  Denbury Resources ,  Whiting Petroleum ,  Canadian Natural Resources (CNQ),  Devon Energy (DVN),  Hess (HES),  EOG Resources (EOG), and  Encore Acquisition  have gone the extra mile to develop long-term oil production projects. 

Where New Technology Pays Off
Human ingenuity is always impressive, especially when high oil prices and potential profits are motivating factors. During the last five to 10 years, the energy industry has seen a burst of activity and advancements in finding and developing new oil fields. Denbury Resources and Whiting Petroleum are using enhanced (or tertiary) oil-recovery methods by injecting carbon dioxide (CO2) into oil deposits to build up pressure and squeeze more oil out of wells. Canadian Natural Resources and other oil sands specialists are finding profitable ways to heat and treat thick, tarlike oil embedded in sand deposits (oil sands) in Alberta, Canada, into crude that can be processed into fuel. Devon Energy, Hess, and other oil producers are using advanced 3-D seismic surveying and subsea exploration technology to find impressive oil deposits in the deeper waters of the Gulf of Mexico. Hess, EOG Resources, and Encore Acquisition are just some of many companies involved in the initial stages of testing potential oil deposits in the Bakken formation in the Williston Basin that stretches from Montana and North Dakota into Saskatchewan.

Home-Grown Oil Stock Picks in U.S. and Canada
Company	Morningstar Rating	Fair Value Estimate	Price/ Fair Value	Market Cap ($ bil)
CO2 Tertiary Oil
Denbury Resources		$37	82%	$7.7
Whiting Petroleum		$72	97%	$3.0
Canadian Oil Sands
Canadian Natural Resources (CNQ)		$96	80%	$42.1
Deepwater Gulf of Mexico
Chevron (CVX)		$98	91%	$186.1
Devon Energy (DVN)		$122	89%	$49.6
Hess Corp. (HES)		$84	113%	$30.9
Bakken Oil
EOG Resources (EOG)		$135	93%	$32.1
Encore Acquisition		$40	102%	$2.2

Why Discipline and "Grit" Is Important
New technology may help in finding new oil deposits, but it takes effective cost discipline and project management to develop new oil deposits profitably. Tertiary CO2 oil and Canadian oil sands fields are in the early stages of development, while many recent deepwater oil and Bakken oil discoveries could take several years before first production. We'll highlight how these companies are meeting the challenges of developing their fields profitably despite cost pressures and labor and equipment constraints.

CO2 Tertiary Oil Recovery
Enhanced oil-recovery methods have been around for years in the U.S. to boost oil production from maturing oil fields. Injecting CO2 into oil wells was first tried in the early 1970s but has recently gained more attention amid global warming concerns and interest in reinjecting carbon dioxide (carbon sequestration).

 Denbury Resources 
Stock Analyst: Catharina Milostan
Denbury Resources stands out among these tertiary oil producers because of its multiyear commitment to using CO2 tertiary oil recovery to drive the bulk of its earnings growth. The firm is leveraged to oil prices with oil accounting for 63% of 2007 production. What makes Denbury Resources special is its 2001 purchase of a naturally occurring deposit of CO2 at the Jackson Dome in Mississippi and its plan to use the Jackson Dome CO2 deposit field as home base for a multiphase expansion program. Early project phases are tied to completing a new or converted CO2 pipeline to transport CO2 from the Jackson Dome to mature oil fields. The firm is just in the early stages, starting up the second of eight project phases in 2007. Denbury's experience using CO2 tertiary oil recovery helps, but we're more encouraged by the firm's ability to move ahead with pipeline construction amid rising material and labor costs. This is where discipline and grit comes in as the firm plans well in advance to secure work crews and orders for pipe, compressors, and other equipment.

 Whiting Petroleum 
Stock Analyst: Justin Perucki
Whiting Petroleum is an oil-leveraged firm with oil reserves accounting for 80% of its proved reserve base. Its reserves are scattered across 16 states with concentrations in Texas, North Dakota, and Michigan. Not surprisingly, Whiting is active in several oil fronts including a major CO2 tertiary oil-recovery project in the Permian Basin in Texas and recent discoveries of Bakken oil deposits in the Parshall and Sanish fields in North Dakota.

Canadian Oil Sands
Alberta's Canadian oil sands projects came to the forefront as a result of advances in technology to convert tarlike oil into refinery-ready crude, or even refined fuel, and a healthy oil price to cover the extra cost of production. The main challenge has been to keep significant new-frontier infrastructure costs in check while starting up major facilities. Several Canadian oil firms are involved in Canadian oil sands projects, but we're focusing on Canadian Natural Resources' Horizon project.

 Canadian Natural Resources (CNQ)
Stock Analyst: Kish Patel
Canadian Natural Resources is a large oil and gas producer operating in western Canada, the North Sea, and offshore West Africa. The firm's primary growth vehicles are oil sands and heavy-oil projects in northern Alberta, but it's also one of Canada's largest natural-gas producers. At the heart of Canadian Natural's growth is the Horizon oil sands project. Management is known for its cost-conscious approach, which came in handy when it was planning its massive Horizon project. Managers took time at the outset to secure bids for project segments with cost-control measures. The first phase of this wholly owned oil sands project is on track for first production in the third quarter of 2008, though cost overruns have become necessary to stay on schedule. Amid boomtown-type cost inflation and labor constraints, Canadian Natural is taking a measured, prudent approach to future phases. The economics of the Horizon project's upgraded oil are promising at well-below today's high oil prices.

Deepwater Oil
Access to the deeper waters of the Gulf of Mexico, more than 7,000 feet below the water surface, became possible as a result of subsea technologies that could handle extreme temperatures and pressures. It took more technology to be able to shoot and interpret seismic data and then drill another 20,000 feet of seafloor to strike oil.

 Devon Energy (DVN)
Stock Analyst: Justin Perucki
Devon and  Chevron's (CVX) important Jack 2 discovery in 2006 reinvigorated the search for ultradeep oil deposits in lower Tertiary-era formations. However, first production from this region is not expected until sometime early next decade. If developed successfully amid still-strong oil prices, the ultradeepwater Jack discovery could become a key future value driver for Devon Energy. Meanwhile, Devon has a full plate of both natural-gas and oil projects in the U.S. and Canada, including its Jackfish oil sands project in Alberta, to drive production growth.

 Hess (HES)
Stock Analyst: Catharina Milostan
With oil accounting for more than 70% of Hess' production, it's not surprising that Hess is involved in several frontier oil fields. We're encouraged by recent drilling success in deepwater spots in the Gulf of Mexico and Bakken Shale properties in North Dakota. We'll be keeping a close eye on appraisal drilling this year to test Hess' Pony and Tubular Bells deepwater Gulf of Mexico discoveries and Bakken properties. Efforts abroad in offshore Equatorial Guinea, Malaysia, Libya, and its 40%-owned block just south of  Petrobras' (PBR) major Tupi discovery are also worth watching this year.

Bakken Oil
Advances with horizontal drilling in gas shale deposits in the U.S. may now come in handy for oil drilling in the Bakken formation of the Williston Basin of North Dakota, Montana, and Saskatchewan. This is another tightly packed, reservoir-type formation that resembles U.S. gas shale plays with the bonus that these are oil-bearing siltstones and sandstones. Not surprisingly, EOG Resources, one of the early gas shale firms, has carved out a position in the region. Encore Acquisition, Whiting Petroleum, and Hess have operations there, as well. However, it's still very early in the exploratory stage, and firms are still testing the potential size of the formation and potential recovery methods.