Market Overview

Four ETFs For The Monterey Shale

When it comes to major oil producing states in the U.S., investors think of the usual suspects and who could blame them? Alaska, Louisiana, North Dakota and Texas typically dominate the conversation about states with significant oil riches.

Whether it's because of the state's excessively liberal politics or the belief that entertainment and technology are the state's dominant industries, California is often left out of the oil conversation. That should not be the case because the Golden State is one of the largest oil producers in the U.S.

In fact, if California can put politics aside and think about job creation and tax revenue, two issues plaguing the state right this moment, oil production could actually increase. Even better is that the argument of so many liberals would be muted because California can increase production onshore through the oil-rich Monterey Shale, an area that stretches from Northern California down to areas east of Los Angeles.

Estimates vary wildly about how much oil lies in the Monterey Shale. Venoco (NYSE: VQ), one of the companies with a significant presence in Monterey, once said there might be 300 billion barrels of oil there. Other estimates have gone as high as 500 billion barrels. Both are probably far too high, but the U.S. Energy Information Administration said earlier this year there could be 15 billion barrels of crude in the Monterey Shale. That's enough to cover two years worth of U.S. consumption and enough to make Monterey a compelling investment opportunity.

With that, here are some ETFs that might be worth watching as production increases in the Monterey Shale.

iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSE: IEO): IEO makes this list for a simple reason: An allocation of more than 16% to California-based Occidental Petroleum (NYSE: OXY). The fourth-largest U.S. oil company, Occidental is the dominant Monterey Shale player with over 1.2 million acres there. Occidental plans to spend $6.3 billion developing its Monterey assets in the coming years, according to OilShaleGas.com.

SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP): Just for the challenge, we'd like to make one of our famous shale ETF lists without XOP, but that would be a futile endeavor. Occidental, Plains Exploration (NYSE: PXP) and Chesapeake Energy (NYSE: CHK) account for 4% of XOP's weight. Not a huge amount, but enough for us to say XOP has Monterey Shale exposure.

Energy Select Sector SPDR (NYSE: XLE): While a predictable constituent for this list, the Energy Select Sector SPDR devotes over 19% of its weight to Chevron (NYSE: CVX), which as a California company is involved in Monterey, and Occidental.

PowerShares Dynamic Energy Exploration & Production Portfolio (NYSE: PXE): The PowerShares Dynamic Energy Exploration & Production Portfolio is a valid Monterey Shale play as Chevron, Plains Exploration and Berry Petroleum (NYSE: BRY) comprise 10.5% of the ETF's weight.

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