The unofficial closing bells put the DJIA up nearly 97 points to 12,720.48 (0.76%), the NASDAQ fell nearly 2 points (-0.06%) to 2,786.70, and the S&P 500 rose a bare 0.07% or less than 1 point to 1,315.37.

There were several analyst upgrades and downgrades today, including Google maintained as ‘buy’ but target price cut to $700 at Canaccord Genuity; Johnson Controls Inc. (NYSE: JCI) cut to ‘neutral’ at JPMorgan; Valero Energy Corp. (NYSE: VLO) reiterated as ‘buy’ with $35 target price at Argus; Tractor Supply Co. (NASDAQ: TSCO) reiterated as ‘buy’ and target price raised to $92 at Argus; and Humana Inc. (NYSE: HUM) cut to ‘market perform’ at Wells Fargo.

Earnings reports since markets closed yesterday have led to some price changes as of the last half hour of trading today: Google is down -8.78% at $583.39; Intel Corp. (NASDAQ: INTC) is up 2.75% at $26.33; IBM Corp. (NYSE: IBM) is up 4.48% at $188.61; Bank of America Corp. (NYSE: BAC) is up 1.42% at $7.06; American Express Co. (NYSE: AXP) is down -1.94% at $49.96; General Electric is down -0.21% at $19.11; Schlumberger Ltd. (NYSE: SLB is up 0.74% at $73.40; and Suntrust Banks Inc. (NYSE: STI) is up 4.79% at $21.21.

Other standouts from today include the following stocks:

Insmed Inc. (NASDAQ: INSM) is up nearly 30% at $4.94. The biotech company announced that the FDA has lifted a clinical hold on a lung disease drug.

The Talbots Inc. (NYSE: TLB) is up nearly 18% at $3.17. The clothing retailer is rumored to be under consideration for a takeover by two private equity firms.

Sears Holdings Corp. (NASDAQ: SHLD) is up nearly 14% at $49.25. The general merchandise retailer is thought to be under consideration for a takeover offer from its largest shareholder.

NCI Inc. (NASDAQ: NCIT) is down nearly -32%, after posting a new 52-week low of $7.71 earlier today. The federal contractor will restructure to compensate for loss of contracts.

Cogent Communications Group Inc. (NASDAQ: CCOI) is down nearly -18% at $15.45. The network communications provider is suffering from the shutdown last night of the Megaupload.com website, one of Cogent’s largest customers, by federal authorities.

Stay tuned for Monday. We have noted the following events on the schedule (all times Eastern):

• 11:30 a.m. – 3-month and 6-month Treasury bill auctions

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Have a great weekend.

Paul Ausick

Competitors Halliburton Co. (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) report results next week. Halliburton is expected to post annual EPS of $3.35 on revenue of $24.58 billion and Baker Hughes is expected to post annual EPS of $4.30 on revenue of $19.90 billion.

For the fourth quarter, Schlumberger posted diluted, adjusted EPS of $1.11 on revenue of $10.97 billion. The consensus estimate called for EPS of $1.09 on revenue of $10.78 billion.

Drilling in the Gulf of Mexico showed the strongest growth in the company’s North American region. Internationally, deepwater drilling offshore of North and West Africa grew most. Schlumberger also showed solid growth in drilling in the Middle East, particularly Iraq.

Here’s what the company had to say about its prospects in 2012:

Uncertainty remains over the outlook for 2012 due to the continuing sovereign debt crisis in Europe which places downward pressure on GDP and oil demand forecasts. Natural gas markets are well supplied in North America with gas storage well above five-year highs. In this environment, the thin excess oil supply cushion is expected to support oil prices close to current levels, while global demand for LNG continues to increase. Recent E&P customer spending forecasts also point to higher E&P investment in 2012, particularly in international markets.

The company is planning on growth in 2012, but did not provide specifics in its quarterly report.

We have many key earnings, including some DJIA components, as follows: Citigroup, Inc. (NYSE: C); Wells Fargo & Co. (NYSE: WFC); eBay Inc. (NASDAQ: EBAY); Goldman Sachs Group Inc. (NYSE: GS); Xilinx Inc. (NASDAQ: XLNX); American Express Co. (NYSE: AXP); Bank of America Corporation (NYSE: BAC); Google Inc. (NASDAQ: GOOG); Intel Corporation (NASDAQ: INTC); International Business Machines Corporation (NYSE: IBM); Intuitive Surgical Inc. (NASDAQ: ISRG); Microsoft Corporation (NASDAQ: MSFT); UnitedHealth Group Inc. (NYSE: UNH); General Electric Co. (NYSE: GE); and Schlumberger Ltd. (NYSE: SLB).

We have added in Thomson Reuters consensus data, as well as other bits of data and color if applicable.

Tuesday, January 17

Citigroup, Inc. (NYSE: C) and Wells Fargo & Co. (NYSE: WFC) both lead Tuesday morning off with earnings, and each are important.  Wells Fargo is the healthier of the two and it does not trade at a discount to book value like its peers because it is deemed the least penalized of the money center banks in the new lower-trading and less risk environment.  Both pulled back after J.P. Morgan earnings, but both were up handily so far this year.

Citi has estimates of $0.49 EPS and $18.54 billion in sales. 

Wells Fargo has estimates of $0.72 EPS on $28.08 billion in sales. 

Wednesday, January 18

eBay Inc. (NASDAQ: EBAY) has a bit of a neutral bias going into Wednesday’s earnings after the close as it is still mostly a domestic story for auctions, with PayPal being the biggest boost.  Earnings estimates are $0.57 EPS and $3.32 billion in revenues.

Read Also: DJIA Expected 12% Gains in 2012 to 13,678

Goldman Sachs Group Inc. (NYSE: GS) is due on Wednesday morning and the earnings estimates have been cratering ahead of the report.  The current target is $1.24 EPS on $6.54 billion in sales, but the earnings targets were above $2.00 EPS recently and the street expected almost $3.00 just about 90 days ago. 

Motor gasoline inventories also fell, but by just 400,000 barrels. Gasoline production fell during the week to around 9.4 million barrels/day, and distillate production rose to around 5 million barrels/day.

The report has pushed up the price of crude oil by about 1.5% this morning, and shares in oil producers like Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) are also rising. Shares in services companies like Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI) are declining.

US demand for gasoline has dropped by about 1 million barrels/day when compared with the same period a year ago. Distillate production has risen by about 2.4% in the same time frame, mostly on demand for diesel fuel for export.

WTI crude is trading at $98.27 and Brent is trading at $107.19. Exxon shares are up 0.75% at $82.62 in a 52-week range of $67.03-$88.23. Chevron is trading up more than 1% at $104.76 in a 52-week range of $86.68-$110.01. Schlumberger shares are trading down about -1.86% at $66.90 in a 52-week range of $54.79-$95.64.

Paul Ausick

The unofficial closing bells put the DJIA down more than 198 points to 11,997.93 (-1.63%), the NASDAQ fell nearly 53 points (-1.99%) to 2,596.38, and the S&P 500 fell -2.11% or nearly 27 points to 1,234.35.

There were several analyst upgrades and downgrades today, including Cisco Systems Inc. (NASDAQ: CSCO) reiterated as ‘buy’ with a price target of $24 at Argus. Other ratings actions today include Diamond Offshore Drilling Inc. (NYSE: DO) started as ‘sell’ with a target price of $70 at Goldman Sachs; Las Vegas Sands Corp. (NYSE: LVS) cut to ‘neutral’ at Janney; Lululemon Athletica Inc. (NASDAQ: LULU) restarted as ‘buy’ at Sterne Agee; Philip Morris International, Inc. (NYSE: PM) cut from ‘buy’ to ‘neutral’ at Nomura; and Schlumberger Ltd. (NYSE: SLB) started as ‘neutral’ at Goldman Sachs.

Here are today’s post-earnings news reactions with prices during the last half-hour of trading: Ciena Corp. (NASDAQ: CIEN) is up 2.7% at $12.23; Costco Wholesale Corp. (NASDAQ: COST) is down -1.3% at $86.33; Smithfield Foods, Inc. (NYSE: SFD) is down -2.6% at $24.29; Layne Christensen Co. (NASDAQ: LAYN) is down -4.1% at $23.61; and Korn/Ferry International (NYSE: KFY) is down -8% at $15.77.

Other standouts from today include the following shares:

DemandTec, Inc. (NASDAQ: DMAN) is up nearly 56% at $13.15. The cloud-software company has accepted a takeover bid from IBM Corp. (NYSE: IBM) of $13.50/share, a 57% premium over yesterday’s closing price.

Affymax, Inc. (NASDAQ: AFFY) is up more than 38% at $8.10. The US FDA has approved the company’s anemia drug for dialysis patients suffering from chronic kidney failure.

E-Commerce China Dangdang Inc. (NYSE: DANG) is up nearly 24% at $5.76. The Chinese e-commerce company has announced that it will issue an e-reader later this month and split content revenue with producers, keeping 40% for itself.

Invacare Corp. (NYSE: IVC) is down more than -25% at $15.39, after posting a new 52-week low earlier today. The medical supplies maker is in danger of having the US FDA close down some of its operations because Invacare has failed to comply with quality standards.

Pinnacle Airlines Corp. (NASDAQ: PNCL) is down about -23% at $1.47, after posting a new 52-week low of $1.40 earlier today. The regional airlines has initiated a program to cut costs and raise liquidity.

Tesla Motors Inc. (NASDAQ: TSLA) is down nearly -3.5% at $30.75. The electric car maker’s stock was downgraded by Morgan Stanley from ‘overweight’ to ‘underweight’ and the target price was slashed from $70 to $44.

Stay tuned for Friday. Here are some noteworthy events on the schedule (all times Eastern):

• 8:30 a.m. – International trade report for October
• 9:55 a.m. – Reuters/University of Michigan consumer sentiment report

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Paul Ausick

Brightpoint Inc. (NASDAQ: CELL) Reiterate as Buy with a $14 price target objective at Canaccord Genuity.
Cisco Systems Inc. (NASDAQ: CSCO) Reiterated as Buy with $24 price target objective at Argus.
Deckers Outdoor Corporation (NASDAQ: DECK) Reiterated as Buy with a $122 price target objective at Canaccord Genuity.
Diamond Offshore Drilling Inc. (NYSE: DO) Started as Sell with a $70 target price objective at Goldman Sachs.
France Telecom (NYSE: FTE) Cut to Underperform and named as Bear of the Day by Zacks Investment Research.
Hatteras Financial Corporation (NYSE: HTS) Cut to Neutral at Stern Agee.
Healthways Inc. (NASDAQ: HWAY) Raised to Buy at Stifel Nicolaus.
Hercules Offshore, Inc. (NASDAQ: HERO) Started as Neutral at Goldman Sachs.
Las Vegas Sands Corp. (NYSE: LVS) Cut to Neutral at Janney Capital Markets.
Lululemon Athletica Inc. (NASDAQ: LULU) Reinitiated as Buy at Stern Agee.
Melco Crown Entertainment Ltd. (NASDAQ: MPEL) Raised to Outperform from Neutral at Credit Suisse.
NRG Energy, Inc. (NYSE: NRG) Cut to Neutral from Buy at UBS.
Philip Morris International, Inc. (NYSE: PM) Cut to Neutral from Buy at Nomura.
Schlumberger Limited (NYSE: SLB) Started as Neutral at Goldman Sachs.
Sonic Automotive, Inc. (NYSE: SAH) named as value stock of the day by Zacks Investment Research.
State Auto Financial (NASDAQ: STFC) Raised to Buy from Neutral at Janney Capital Markets.
Veolia Environnement S.A. (NYSE: VE) Cut to Hold from Buy at Deutsche Bank.
VeriSign, Inc. (NASDAQ: VRSN) Raised to Outperform and featured as the Bull of the Day by Zacks Investment Research.
Weatherford International Ltd. (NYSE: WFT) Started as Buy with a $22 price target objective at Goldman Sachs.
Yum! Brands, Inc. (NYSE: YUM) Reiterated Buy with $65 fair value target at Janney Capital Markets.

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JON C. OGG

In its November report, OPEC cut its estimate of world economic growth in 2012 from 3.7% to 3.6%, though the cartel did leave its oil demand forecast unchanged at 1.2 million barrels/day, up from 900,000 barrels/day of increased demand in 2011. OPEC expects demand for its crude to rise by 1 million barrels/day next year, and non-OPEC demand to rise by 200,000 barrels/day. The services companies need stronger demand growth if they are themselves to grow.

The six companies we’ve looked at for this report are Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), BakerHughes Inc. (NYSE: BHI), Transocean Ltd. (NYSE: RIG), National Oilwell Varco, Inc. (NYSE: NOV), and Weatherford International, Inc. (NYSE: WFT). All have market caps greater than $10 billion, even though share prices have fallen by a minimum of -1% since the end of July.

All data from Yahoo! Finance, and current share prices were gathered just before noon today.

Schlumberger Ltd. (NYSE: SLB) has a median target price of $94.00 from 27 brokers. Shares are trading today at $70.79, for a potential upside of $23.21, or 32.8%. The company pays a dividend yield of 1.3 and has a forward P/E of 14.46. Schlumberger’s target price has dropped from $105 to $94 in just four weeks, and its share price today is barely 1% higher than it was then. The company missed expectations on its last earnings report and the weaker demand and economic forecast going forward continues to put pressure on the stock. The company’s target price is in no imminent danger of being reached. In fact, the target will likely be revised downward again before the company reports fourth quarter earnings. EPS estimates for the fourth quarter have fallen by $0.10 in the past 60 days.

Halliburton Co. (NYSE: HAL) has a median target price of $53.50 from 28 brokers. Shares are trading today at $35.93, for an implied gain of $17.57, or 48.9%. The company pays a dividend yield of 0.9% and its forward P/E is 8.84. Halliburton’s target price has fallen from $63.00 to $53.50 in the past four weeks, even though the company managed to beat third quarter EPS and revenue estimates. The company has put a lot of eggs in the shale gas and oil drilling basket, and that has so far paid off everywhere but in the company’s share price. Fourth quarter EPS estimates have decreased by -$0.04 in the past 60 days and while the implied upside is very attractive, Halliburton certainly won’t get near it.

Baker Hughes Inc. (NYSE: BHI) has a median target price of $76.00 from 25 brokers. Shares are trading today at $54.24, for an implied upside of $21.76, or 40.1%. The company pays a dividend yield of 1% and its forward P/E is 9.82. Like every other stock in this group, Baker Hughes’ target price has dropped in the past month, from $91.00 to its current level of $76.00. The company missed third quarter EPS estimates, but fourth quarter estimates have risen by $0.01 in the past 60 days. The company’s share price today is -4% lower than it was on October 19th, when we last looked at these stocks. Again, the implied gain is not on the table for the current quarter, and likely not for at least part of next year.

Transocean Ltd. (NYSE: RIG) has a median target price of $67.50 from 34 brokers. Shares are trading today at $48.18, for a potential upside of $19.32, or 40.1%. The company pays a dividend yield of 6.4% and its forward P/E is 11.59. Tranocean stock is still weighed down by the company’s exposure to claims related to the Macondo well explosion that killed 11 workers and spilled 5 million barrels of crude into the Gulf of Mexico. Although the company’s target price has dropped from $71.50, its upside potential remains near the same level it was a month ago. Until that spread narrows, the only way Transocean gets nearer its target price is if the target is lowered again.

National Oilwell Varco, Inc. (NYSE: NOV) has a median target price of $88.00 from 24 brokers. Shares are trading today at $67.32, for an implied upside of $20.68, or 30.7%. The company pays a dividend yield of 0.7% and its forward P/E is 11.51. The company raised its quarterly dividend from $0.11 to $0.12 yesterday, boosting its yield slightly. If any of these services companies has a chance to hit its price target, National is the likeliest mainly because its upside potential is the smallest.

Weatherford International, Inc. (NYSE: WFT) has a median price target of $22.50 from 26 brokers. Shares are trading today at $14.95, for an implied gain of $7.55, or 50.5%. The company pays no dividend and its forward P/E is 9.88. Weatherford’s share price today is about -1.3% below its level of a month ago, and its it target price is $1.50 lower. That says about all there is to say about Weatherford’s ability to deliver those implied gains.

Of all these companies, only National Oilwell Varco has much of a chance to deliver on these promises of expected gains. Its price target fell from $95 to $88, putting the target within reach, but not so close that it will be automatic. Even rising crude oil prices aren’t likely to spur a lot more exploration and drilling in the near term, and that’s what National and the rest of this group needs.

Paul Ausick

Schlumberger Ltd. (NYSE: SLB) has a median target price of $105.00 from 26 brokers. Shortly before noon today, shares are trading today at $70.00, for an implied gain of $35.00, or 50%. Schlumberger’s forward P/E is 13.15 and the company pays a dividend yield of 1.5%. The stock’s 52-week trading range is $54.79-$95.64, and at today’s price that’s about 28% above its 52-week low and 27% below the 52-week high. Schlumberger is the largest of the services companies and it has had four straight quarters of revenue growth and three of four quarters of profit growth. The company reports earnings on Friday, and is expected to post EPS of $1.01 on $10.25 billion in revenue. That’s revenue growth of 50% and EPS growth of 30%. The constraint on these numbers going forward is a weakening demand for energy as the global economy continues to struggle. With its upside potential and recent track record, the implied gain for Schlumberger is within reach.

Halliburton Co. (NYSE: HAL) has a median target price of $65.00 from 27 brokers. Shares are trading today at $34.69, for an implied gain of $30.31, or 87%. Halliburton’s forward P/E is 7.85 and the company pays a dividend yield of 1%. The stock’s 52-week trading range is $27.21-$57.77, and at today’s price that’s about 27% above its 52-week low and 40% below the 52-week high. Halliburton reported earnings on Monday, beating EPS estimates of $0.92 by $0.02 and posting record revenue of $6.54 billion. The company is the largest seller of hydraulic fracturing (fracking) services in the US, and with interest in the method growing internationally, the company is well positioned to continue growing both revenues and profits. Halliburton’s shares have fallen slightly since its last report, likely due to overall economic conditions and the scant beat of EPS expectations.

Baker Hughes Inc. (NYSE: BHI) has a median target price of $91.00 from 24 brokers. Shares are trading today at $56.58, for an implied gain of $34.42, or 61%. Halliburton’s forward P/E is 9.75 and the company pays a dividend yield of 1.1%. The stock’s 52-week trading range is $41.91-$81.00, and at today’s price that’s about 35% above its 52-week low and 30% below the 52-week high. Baker Hughes last month increased the amount of borrowing available to it under its revolving credit facility to $2.5 billion. The interest rate on the facility varies from 0.625% to 1.125%, and S&P rates the company’s unsecured debt at ‘A’. In its most recent quarter, Baker Hughes improved EPS by more than double compared with the same period a year ago. Expectations for the third quarter, which ended in September, are for another doubling of EPS.

Transocean Ltd. (NYSE: RIG) has a median target price of $72.50 from 34 brokers. Shares are trading today at $50.99, for an implied gain of $20.51, or 40%.Transocean’s forward P/E is 8.95 and the company pays a dividend yield of 6.3%. The stock’s 52-week trading range is $41.88-$85.98, and at today’s price that’s about 22% above its 52-week low and 41% below the 52-week high. Transocean is most often thought of as an offshore drilling company, but it also provides many services similar to the Halliburtons and Schlumbergers of the world. The big difference is that it does not offer those services onshore. The other big difference is that Transocean has not yet come to an agreement with BP plc (NYSE: BP) over Transocean’s culpability for the Macondo well explosion. Until that is settled, the company remains under a cloud of uncertainty. The company’s share price is down more than -20% in the past year, the most of any company in this group.

National Oilwell Varco Inc. (NYSE: NOV) has a median target price of $95.00 from 23 brokers. Shares are trading today at $66.09, for an implied gain of $28.91, or 44%.National’s forward P/E is 11.59 and the company pays a dividend yield of 0.7%. The stock’s 52-week trading range is $47.41-$86.71, and at today’s price that’s about 39% above its 52-week low and 24% below the 52-week high. National has just completed a $777 million acquisition of a pipe maker in order to be able to offer additional field services to its customers. The company also received a ‘buy’ rating from analyst firm Sterne Agee yesterday and earlier received an outlook rating of ‘positive’ from S&P. At the end of the last quarter, the company’s long-term debt totaled $500 million, and other acquisitions are not out of the question. The recent acquisition of Complete Production Services, Inc. (NYSE: CPX) by Superior Energy Services, Inc. (NYSE: SPN) could be an indicator that smaller services companies are in play.

Weatherford International Inc. (NYSE: WFT) has a median target price of $24.50 from 24 brokers. Shares are trading today at $15.15, for an implied gain of $9.35, or 62%.Weatherford’s forward P/E is 9.43 and the company does not pay a dividend. The stock’s 52-week trading range is $10.85-$26.25, and at today’s price that’s about 40% above its 52-week low and 42% below the 52-week high. Weatherford, like Transocean, has seen its share price fall in the past 52-weeks. Weatherford, like National, may be shopping for acquisitions, but the company’s $6.2 billion in long-term debt and modest free cash flow could be problematic.

Paul Ausick

The violations, called Incidents of Non-Compliance, against BP were expected. Those against Transocean and Halliburton were not. Each company received four citations in what is believed to be the first time that a sub-contractor has been cited for violations related to a particular incident. Cameron International Corp. (NYSE: CAM), maker of the failed blow-out preventer at the Macondo well, was not cited.

In its announcement of the violations, BSEE noted that “BP, Transocean and Halliburton’s conduct in connection with the operations at the Macondo well violated a number of federal offshore safety regulations under BOEMRE’s jurisdiction.” The BSEE aknowledged that this is the first time that contractors have been held responsible for violating regulatory rules, but cited the “severity of the incident” as the reason to hold all parties responsible.

The oil field services industry, drillers, and other contracted services providers are literally quaking in their shoes over the implications of the BSEE’s announcement. The BSEE charges, if not overturned in the inevitable litigation that will follow the decision, will provoke a major change in the relationship of contractors like Transocean and Halliburton to operators like BP. The ruling will hit other services companies and drillers like Schlumberger Ltd. (NYSE: SLB), Baker Hughes Inc. (NYSE: BHI), and National Oilwell Varco, Inc. (NYSE: NOV) among many others.

The most immediate impact could come in insurance costs. Because contractors have never before been held accountable for operational incidents, their insurance coverage has likely been on the minimal side. That will change, and insurance rates will surely rise.

The second change will be in the rates that contractors charge operators. The added insurance coverage will bump up day rates and other charges, and an “uncertainty premium” will likely also have to be negotiated. That is, if the contractor is merely doing what the operator demands, but is still liable if an accident occurs, contracts will have to reflect the cost to the contractor of possibly casual compliance by the operator with existing regulations. Pricing that will be contentious to say the least.

Whatever happens, the cost to drill a well just went up, which will affect operators like BP and the other exploration and production companies as well. And because the operators are at the mercy of the crude oil markets, their higher costs may not be reflected in the price they can get for their oil. That will affect operator revenues and profits as well.

The logic behind BSEE’s decision is certainly arguable. On one hand, for the contractors to claim they were just following orders is a pretty weak defense. On the other hand, if it can be shown that following orders meant ignoring accepted safety standards, then the contractors should pay. They are under no obligation to violate safety regulations in service of the operators. Quite the contrary, in fact.

Stock prices among the services companies are down about twice as much as the overall market just before noon today. Transocean’s shares are off more than -3.5%, at $47.30, in a 52-week range of $43.15-$85.98. Halliburton’s shares are off about -2.2%, at $34.30, in a 52-week range of $27.21-$57.77. Shares of Baker Hughes are off more than -2.5%, at $52.05, in a 52-week range of $41.91-$81.00. Cameron is off about -1.5%, at $46.76, in a 52-week range of $38.77-$63.16.

Paul Ausick

China, in particular, stirs a lot of interest because its technically recoverable shale gas deposits are estimated to be about 1,275 trillion cubic feet (Tcf). That’s about 50% more than the estimated 862 Tcf of technically recoverable shale gas in the US. And US companies like Baker Hughes Inc. (NYSE: BHI), Halliburton Co. (NYSE: HAL), Schlumberger Ltd. (NYSE: SLB), and National Oilwell Varco, Inc. (NYSE: NOV) with both deep pockets and experience in shale gas exploration and production could get a crack at developing China’s vast shale gas deposits. US producers like Chesapeake Energy Corp. (NYSE: CHK) and Devon Energy Corp. (NYSE: DVN) are less likely partners, but such a deal is not impossible.

To date, no development of China’s shale gas resources has begun. The government is mulling plans both to offer subsidies to domestic E&P companies and to permit foreign company participation in extracting the gas. China’s approach to allowing its domestic companies to develop shale gas is something of a balance between granting licenses only to big players like Sinopec, formally China Petroleum & Chemical Corp. (NYSE: SNP), Cnooc Ltd. (NYSE: CEO), and China National Petroleum Co.’s Petrochina Ltd. (NYSE: PTR) and permitting smaller players to get into the hunt.

The government wants to avoid the development of hundreds of independent companies, as happened with the coal mining industry. The unlicensed coal mines were extraordinarily lethal to miners and riddled with corruption. The central government has fought hard to bring the miners under control in the last two years or so.

The Chinese have no experience or technology to develop their shale gas resources. Royal Dutch Shell plc (NYSE: RDS-A) has already been signed on by one of the two small Chinese companies to win a lease and the company has also formed a partnership with Petrochina.  Chevron Corp. (NYSE: CVX) and BP plc (NYSE: BP) are in discussions with Sinopec to form a partnership as well. Cnooc paid Chesapeake more than $2 billion for rights to participate in developing some Eagle Ford shale leases.

As China’s government continues to explore its options regarding shale gas development, one thing does seem clear. The government is leaning towards a less restrictive approach than it has taken with other hydrocarbon development. The country is also likely to adopt some sort of subsidy policy that would encourage shale gas development. That would be enough to really get foreign companies lined up to go to work.

Paul Ausick