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Energy Stocks Research; The Role of Independent Producers in America's Energy Future

Independents now play a vital role in supplying America’s energy

Lisa Springer, CFA, Equity research analyst and financial writer
Point Roberts, WA
November 8, 2010

(Investorideas.com Energy Newswire) – www.Investorideas.com, an investor research portal specialized in sector investing, issues energy sector commentary from Lisa Springer, CFA, equity research analyst and financial writer. The report entitled,' The Role of Independent Producers in America's Energy Future' includes Energy Stocks: American Petro-Hunter, Inc. (OTC.BB: AAPH) , like BP (NYSE:BP), ExxonMobil (NYSE:XOM) , Chevron (NYSE:CVX), Chesapeake (NYSE:CHK), Devon Energy (NYSE:DVN) and Southwestern (NYSE:SWN).

Despite the existence of bountiful untapped domestic reserves, America remains largely dependent on foreign oil. At present, the US imports over 2/3rds of its oil at costs estimated to exceed $300 billion annually. Much of this imported oil comes from the politically unstable Middle East, which controls approximately half of world supplies.

A common misperception is that the US imports oil because domestic resources are tapped out. The reality is that the US has huge undeveloped oil ad gas resources. A new study released last February by the National Association of Regulatory Commissioners and the Gas Technology Institute estimates America's untapped domestic reserves at 2,000 trillion cubic feet of natural gas and 229 billion barrels of oil. That's a greater resource than most OPEC countries. In addition, tapping these reserves could add as much as $2.4 trillion to GDP over the next 20 years, according to the report.

Domestic reserve estimates rose because of new drilling technologies, which allow producers to tap previously unreachable “unconventional” reserves such as shale gas (i.e. gas trapped in shale bedrock). Large oil and gas deposits are found offshore Alaska and in the Gulf of Mexico, but there are also significant onshore resources in the Lower 48 states. Some 32 US states currently produce oil and gas. Big producers include Arkansas, Kansas, Oklahoma, Wyoming, Colorado, Montana, Texas and California.

Tapping domestic fossil fuel supplies could free the US from oil imports, create thousands of new oilfield jobs and secure America's energy supply for the next 200 years. There has been little encouragement from the current US administration, however, which is focusing more on renewable energy like wind and solar. Despite government incentives, these sources still make up just 1% of usage and remain prohibitively expensive. Wind farms produce electricity, but at seven times the cost of coal fired plants. Solar cells take up several square miles of land to yield a similar result. Alternative sources of energy are years away from being feasible solutions to America's energy challenge.

At present, the effort to secure America's energy future is led by America's independent oil and gas companies. Independent producers don't get the press coverage of the majors like BP (NYSE:BP), ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), but nonetheless are responsible for getting most of America's oil out of the ground. The majors have switched their exploration focus to offshore and foreign countries, leaving the independents to become increasingly involved in domestic oil and gas drilling.

Independents now play a vital role in supplying America's energy and account for virtually all of the production from the Lower 48 states. Independents develop around 90% of the nation's wells. In addition, according to the Department of Energy, independents supply over 70% of America's oil production and more than 80% of natural gas production.

Independent producers range in size from 1-2 man operations to multi-billion dollar public companies like Chesapeake (NYSE:CHK), Devon Energy (NYSE:DVN) and Southwestern (NYSE:SWN). The average independent producer, according to the Independent Petroleum Association of America, has been in business 26 years, employs 11 full-time workers and generates gross revenues from oil and gas sales of just under $8 million.

The universe of independent producers includes a number of development stage exploration and production companies like American Petro-Hunter (OTCBB: AAPH). These companies are building reserves and developing production from properties that no longer fit the portfolios of the majors or large independents. American Petro-Hunter and others are taking advantage of recent innovations in drilling technology to exploit sizable “home-grown” resources that can still be found in the Lower 48 states.

Large numbers of undeveloped or partially developed properties are available for acquisition. American Petro-Hunter is particularly focused on smaller, under-utilized fields that can be acquired via farm-ins and/or outright purchases. The Company also looks for properties close to existing infrastructure and gathering systems, currently producing or having produced in the past and showing strong potential for undeveloped reserves. American Petro-Hunter has acquired several projects meeting its criteria in Kansas, Oklahoma and California.

So far, this strategy has yielding tangible results. American Petro-Hunter (OTCBB: AAPH) is already generating revenues from its Poston Prospect in Kansas, which has been in production since mid-2009 and is cash flow positive with production from this field. The Company's goals over the next 1-3 years are to diversify its production and revenues by drilling multiple projects and to become a 500-1,000 BOE producer. Longer-term, American Petro-Hunter aims to boost production above the 1,000 BOE level. At this level, the Company becomes attractive as a merger or acquisition candidate to a large player . American Petro-Hunter recently secured $1.5 million to fund near-term drilling activities, but will need to raise at least $3.5 million more to implement its longer-term plan.