In today's energy market, investors often try to distinguish between oil plays and natural gas plays, but the distinction is often moot -- most of today's wells produce a healthy amount of both.

The key to finding winning investments is to focus on the relative productivity of a firm's well.



Let's focus first on natural gas (we'll shift the discussion to oil in a moment).

The natural gas market appears to have settled into long-term equilibrium. You'll surely see short-term spikes in prices when the weather gets especially cold (as increasingly appears to be the case this winter).

But unless we have strongly overestimated that amount of untapped oil and gas remaining in our shale regions, then supply increases will be the likely result of any upward move in natural gas prices.

As a result, gas prices may move into the $4 to $4.25 per thousand cubic feet (Mcf) area, but much more upside than that is unlikely. In fact, the natural gas futures market doesn't anticipate a move up above the $4.50 mark until January 2019.



To be sure, gas prices in the $3.50 to $4.50 range explain why share prices of many gas producers remain in a funk. But even at these lower prices, some gas producers are extremely profitable. And it's all about geography.

As geologists have come to realize, some shale regions produce gushers with very little drilling effort. That helps keep expenses very low and enables firms operating in these areas to make ample profits even if gas prices fall to the lower end of the price range noted above.

The most productive shale regions in terms of natural gas production: the Haynesville and Marcellus shales. According to a recent report by the Energy Information Administration (EIA), these two regions are seeing robust output from every new well deployed. "Drilling productivity has increased 50% annually in the important Marcellus gas play and 30% annually in the Haynesville play," notes Barclay's Tom Driscoll in a recent report.

Driscoll thinks the productive output in the Marcellus Shale is leading to solid output and profit gains for Noble Energy (NYSE: NBL). (Incidentally, I am a big fan of this company, thanks to its additional exposure to exposure to massive natural gas fields off of the coast of Israel.)

Changing Dynamics In Oil Productivity