Lower Break-Evens Through Technology
Every earnings season, companies in the oil-field services industry highlight emerging technologies that can help upstream operators to improve their well productivity, boost operational efficiency and reduce per-barrel production costs.
Management teams usually spotlight these products and services because these innovative products and services command higher profit margins, at least until these technologies become commoditized.
For example, Paal Kibsgaard highlighted Schlumberger’s recently introduced AxeBlade drill-bit, which increased the penetration rate on Matador Resources’ (NYSE: MTDR) horizontal wells in the Permian Basin by 35 percent.
The company also spotlighted its PowerDrive Orbit rotary steerable system, which sold out for the third consecutive quarter and helped Parsley Energy (NYSE: PE) to reduce its average drilling time in the Midland and Delaware Basins by 17 percent and its cost per lateral foot by about 30 percent.
Other highlights from Schlumberger’s product portfolio include the HEAL artificial lift system, which reduces the need for workovers on mature wells and has delivered average production increases of 45 percent after installation.
Management also called for a recovery in demand for its HiWAY fracturing solutions, a technology that reduces proppant consumption by 40 percent and water use by 25 percent.
Baker Hughes likewise highlighted the growing popularity of its AutoTrak rotary steerable franchise, which accounts for about 80 percent of the company’s drilling margins and significantly reduces the time needed to sink longer horizontal wells that target the formation’s most productive horizons.
CEO Martin Craighead also argued for the importance of the drill-bit to future efficiency and productivity gains, highlighting Baker Hughes’ innovative TerrAdapt drill-bit, which extends and retracts autonomously to optimize performance in response to different rock qualities. Technical studies suggest that this technology can increase the average penetration rate by 27 percent, reducing the time needed to drill a well.
Halliburton’s management team set aside time on its first-quarter earnings call to focus on the company’s efforts to improve efficiency and reduce costs by leveraging big data, machine learning and other digital technologies to automate drilling and completion processes—topics that came up repeatedly at the DUG Permian Basin Conference we attended in early April.
On Core Laboratories’ (NYSE: CLB) first-quarter earnings call, management highlighted several trends that will shape oil and gas development in coming years.
In addition to well-established trends toward longer laterals, increased proppant loads and tighter spacing between fracturing stages, management highlighted growing interest in Core Laboratories’ pioneering effort to develop techniques to enhance oil recovery from mature shale wells. The company reports that cycling miscible gases through the play can boost recovery rates from 9 percent of oil reserves to between 13 and 15 percent—a breakthrough that can increase an upstream operator’s return on investment significantly.
Management asserted that these enhanced-recovery techniques are particularly effective when combined with a completion design that involves pumping ultra-fine micro-proppant into the reservoir rock early in the hydraulic fracturing process and finishing with a load of coarser-grained sand.
Core Laboratories has found that this approach creates secondary and tertiary fracture networks, significantly increasing the surface area in the reservoir that’s exposed to these conduits—a key to boosting initial production and overall recovery rates.
Diagnostics that quantify inter-well communication will also become increasingly important as upstream operators seek to exploit the multiple productive horizons in the Permian Basin via multi-well pad drilling. These tests can help to limit bashing, which occurs when the fractures from one wellbore infiltrate nearby wells, reducing productivity.
Bottom Line: Instead of regarding these innovations as company-specific upside drivers, we prefer to view these advances as another sign that upstream operators will continue to squeeze additional efficiencies out of US shale plays, lowering break-even costs and boosting productivity.
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Oct. 30, 2017
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.