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Energy Stocks

Technology Trends in Midstream Energy Producers

By Roger S. Conrad, on Aug. 20, 2017

Editor’s Note: This article originally appeared in Capitalist Times sister publication Energy & Income Advisor, your complete guide to energy and income investing. It features in-depth reporting and analysis of energy and income stocks, making it a great value for those who want a particular edge in energy investing.

The ability of shale oil and gas producers to adjust to price signals relatively quickly should enable the US to take market share by responding to growing global demand for petroleum products and offsetting output declines related to aging fields and industry underinvestment.

In addition to the short-cycle nature and predictability of US shale plays (bad wells aside, dry holes don’t happen), the industry continues to refine its drilling and completion techniques and processes to drive break-even costs lower and unlock additional resources.

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.

For example, Paal Kibsgaard highlighted Schlumberger’s (NYSE: SLB) 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.

Baker Hughes (NYSE: BHI) likewise touted 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.

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.

Instead of regarding these innovations as company-specific upside drivers, we prefer to view these advances as another sign that upstream operators will squeeze additional efficiencies out of US shale plays, lowering break-even costs and boosting productivity.

Moreover, these technological advances and operators’ improving understanding of shale geology enables the industry to unlock additional resources that can compete for capital.

Consider the revivification of the Haynesville Shale via the application of longer laterals and enhanced completion techniques or Parsley Energy’s impressive well results in the Wolfcamp C, an oil-bearing horizon that many operators had given up on after discouraging early results.

Apache Corp (NYSE: APA) also made big headlines with its discovery of the Alpine High play, which the company billed as a massive oil discovery. Thus far, the roughly 40 wells that Apache has sunk in this region have produced primarily natural gas and natural gas liquids (NGL), though the company plans to target some shallower horizons that could be prospective for crude oil.

And earlier this year, we heard rumors that the Wyoming’s oil-rich Powder River Basin had emerged as a hot property among private-equity outfits seeking to acquire, develop and flip undervalued acreage. Rig counts and well permitting in the Powder River Basin have ticked up considerably during the up-cycle, and economics continue to improve.

Chesapeake Energy Corp (NYSE: CHK) has hyped its 307,000 acres in the region as the primary driver behind its push to grow its oil output and has announced some impressive well results with oil cuts above 75 percent. EOG Resources (NYSE: EOG) and Devon Energy Corp (NYSE: DVN) also remain active in the play and hold sizable acreage positions, though both companies remain focused on developing their marquee assets in Permian Basin and other established plays.

Bottom Line: The short-cycle nature of shale plays, coupled with improving efficiency and productivity that continue to unlock more resources, should enable the US to continue to take market share in an environment where oil prices remain lower for longer. We’ve already seen this phenomenon in the current up-cycle.

Roger S. Conrad is chief editor of Conrad’s Utility Investor. He co-founded Capitalist Times and Energy & Income Advisor with Elliott H. Gue.

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