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These Energy Firms Look Cheap Today

Good acreage and very lean operations make RSP Permian and Diamondback our top exploration and production picks.

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Dave Meats: The potential exhaustion of Tier 1 shale acreage is a common fear in the market that we think is overblown. Shale fields are not homogenous--the productivity is higher in so-called sweet spots, and there's a lot of uncertainty about how much of the good stuff is left. If it runs out soon, the marginal cost of production could rise significantly, taking oil prices with it.

In the Eagle Ford Shale specifically the best acreage could be drilled up in about five years, but this does not apply to the Permian Basin or the Bakken. The Permian is at least 10 times thicker than the Eagle Ford, and there's enough runway in the Tier 1 sweet spot to keep operators busy for another 15 to 20 years. Bakken operators still have plenty of low-cost prospects as well. And don't forget, while the shale industry has already made huge productivity advances through technology, including longer laterals and high-intensity completions, there's still scope for further improvements that could offset any acreage-related declines. There's no shortage of Tier 1 acreage, and no mechanism for crude prices to move higher, even though that's what the market expects.

Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.