The Latest Major Energy Discovery Could "Dwarf North Dakota"

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The American Energy Renaissance has gotten a lot of press. And it should. The prediction that the United States will surpass Saudi Arabia as the world's largest oil and gas producer by 2020 is big news.

But what's truly amazing about this story is that the headlines just keep coming.

Regular readers of StreetAuthority are by now probably familiar with the enormous and expanding reserves of oil and gas that have been discovered in the Bakken Shale of North Dakota, the Marcellus Shale in the Mid-Atlantic region and the Eagle Ford Shale in Texas.

In fact, Scarcity and Real Wealth Editor Nathan Slaughter just gave his subscribers an in-depth analysis of a new discovery in his home state of Louisiana: the Tuscaloosa Shale Formation.

And now another play is ramping up in the West Texas region, a find with so much potential that John Breyer, a geologist and technical consultant for Marathon Oil Corp. (NYSE: MRO), has said it could "dwarf" the reserves already discovered in North Dakota.

"It's like the Eagle Ford on steroids. They haven't even begun. We're just in the toe of this thing," Ken Morgan, director of the Texas Christian University Energy Institute, has said.

It may be hard to imagine that new discoveries are still being made in Texas. After all, the state is practically synonymous with oil barons and energy riches. Companies like ConocoPhillips (NYSE: COP) and Exxon Mobil (NYSE: XOM) are based in Texas, and the first Texas oil well was drilled in 1866.

But with new hydraulic fracturing (fracking) technology, reserves once deemed unreachable are now being recovered.

The latest region undergoing horizontal exploration is known as the Permian Basin in West Texas. This region is home to the well-known Spraberry Field, from which 10 billion barrels have been recovered since drilling began in the 1950s.

Though there are a number of promising new plays inside the 300-mile-long Basin, today I'd like to focus on the Cline Shale play.

Two companies, Devon Energy Corp. (NYSE: DVN) and Chesapeake Energy (NYSE: CHK), recently reported impressive test results in the region. Devon's wells show that the formation contains 3.6 million recoverable barrels of oil per square mile. As the Cline is roughly 9,800 square miles in size, this works out to estimated reserves in excess of 30 billion barrels.

These reserves could easily eclipse the Bakken (4.3 billion barrels according to conservative government estimates) and the Eagle Ford (3 billion barrels).

Something I should point out here is that the numbers quoted above are subject to change, have changed often in the past and can vary wildly depending on your source.

Still, Devon's total proved reserves stand at 3 billion barrels of oil equivalent. And if Devon's estimations about the Cline play come anywhere close to being accurate, then energy investors should be taking a long, hard look at the stocks.

What's even better, Devon is trading at a reasonable 10.5 times estimated earnings for 2013 (compared to the S&P's 13.3).

Due in part to disappointing year-over-year earnings and the rock-bottom price of natural gas, Devon's shares just hit a three-year low in December 2012 at about $51 per share. Since then, the stock has been in an uptrend, trading around $54 today.

Risks to Consider: Devon is well-managed and carries very little debt. I don't see much downside risk at today's prices. However, if there is a substantial and continued decline in oil and gas prices or an uptick in the cost of operations, then these conditions would erode Devon's bottom line.

Action to Take --> I estimate that Devon will rise to retest resistance near $60, so any price below $59 is a great entry point for investors. Once its Cline shale play is fully developed, and when gas and oil prices eventually rise, the stock will be poised to nearly double its price.