The New York Times recently ran a series of stories that questioned the sustainability of the shale gas revolution. In particular, these pieces suggested that many shale gas producers have overstated the productivity of their wells and that these operations are unprofitable with natural gas prices at depressed levels.

The articles also slam the Energy Information Administration, the statistical arm of the Dept of Energy, for being too cozy with the industry and overly relying on data provided by oil and gas producers.

Although these criticisms have gained traction in the mainstream media and among investors, my outlook for oil and natural gas prices remains unchanged. I also remain bullish on Wildcatters Portfolio holding EOG Resources (NYSE: EOG), which produces oil from the Bakken Shale and a host of other liquids-rich unconventional plays.
The New York Times articles distort data and reflect a fundamental misunderstanding of the energy business and how reserves are calculated. For example, the articles emphasize that many shale gas plays are unprofitable at current prices and that high decline rates on these wells raise questions about the long-term viability of these fields.

These stories are correct that some shale gas fields are uneconomic in the current pricing environment, which explains why drilling activity has declined in the natural gas-rich Barnett Shale and Haynesville Shale.
Meanwhile, the articles largely ignore the economics of the Eagle Ford Shale and other unconventional fields that produce large amounts of high-value oil, condensate and natural gas liquids such as butane, ethane and propane. In general, exploration and production firms have shifted production from dry-gas fields to liquids-rich plays that offer superior profitability. Many investors have picked up on this distinction; stocks of companies that have failed to make this transition have underperformed.

Moreover, the shale gas industry has undeniably changed the domestic energy mix in recent years: Over the past half-decade, natural gas production from US unconventional fields has soared to about one-quarter of total domestic gas output–up from only 4 percent.

This production boom has enabled the US to overtake Russia as the world’s leading producer of natural gas, while the resulting supply overhang and closed domestic market has ensured that the country enjoys gas prices that are far lower than anywhere else in the world.

Why did producers continue to drill in gas-only fields despite unattractive economics? Many leasing contracts require operators to sink a commercially viable well within an established period to secure the acreage.
This involuntary drilling activity catalyzed a wave of joint ventures and acquisitions that have occurred in recent years–an important source of capital to support these programs. Many of the acquirers are large, integrated energy companies that boast bulletproof balance sheets and can afford to take a long-term view on natural gas prices and demand.

Meanwhile, production growth from the Bakken and other oil-rich onshore fields has reversed the steady decline in US oil output. An influx of oil from these unconventional fields has contributed to the low price of West Texas Intermediate crude oil, which trades at a discount to Brent crude because of a supply glut at the Cushing, Okla. delivery point.

Finally, New York Times articles cite steep decline rates and dramatic variations in well performance between the core areas and less-productive peripheral wells as evidence of industry fraud. But this information is common knowledge–at least to investors who pay attention. Major producers routinely share detailed production data that show first-year decline rates of 80 percent in some fields. This isn’t a revelation: Unconventional wells tend to exhibit high initial production rates, but many wells can still prove profitable despite high decline rates.

To be sure, some shale gas companies–particularly those that were late to the game or overpaid for undesirable assets–pursued flawed business strategies and fell prey to a herd mentality. But our bet on EOG Resources, which generated 65 percent of its revenue from liquids in 2010, should continue to benefit from strong oil prices and growing production in its core plays. Buy EOG Resources up to 125.

At the same time, we also cashed out of Marcellus Shale operator Range Resources Corp (NYSE: RRC) in the April 21, 2011, issue for a roughly 28 percent gain, citing the recent rally in the stock and our ongoing concerns about natural gas prices. We continue to rate Gushers Portfolio holding Petrohawk Energy Corp (NYSE: HK) a hold, as most of its acreage in the Haynesville Shale is held by production and the company is ramping up activity in the liquids-rich Eagle Ford Shale.