What's the difference between an oil well and a very expensive hole in the ground? Advanced hydraulic fracturing techniques, in many cases. That's why
Editor Jim Letourneau is following service companies that are helping producers get to the finish line on time and under budget. In this interview with
, Letourneau discusses new ways to play the ever-evolving shale revolution.
: Shoal Point Energy Ltd. : Wavefront Technology Solutions Inc. :
The Energy Report: On July 26, George Phydias Mitchell died at the age of 94. The late Texas oilman had pioneered the use of horizontal drilling and hydraulic fracturing. Can you speak about his achievements?
Jim Letourneau: Mitchell was the founder of the entire shale oil/shale gas revolution. For decades, the Texas wildcatters had known that there was gas in the Barnett Shale, but it was very difficult to get it out. Mitchell did not invent the fracking technologies. He just wanted to get the gas out of the shale. And as the owner of an oil company, he got to challenge the technical people. He basically said, "If you guys can't figure it out, I'll find someone who can." He had the power and the money and the persistence to make it work. Mitchell Energy & Development Corp. began working on the problem in 1981, and it took until 1999 to figure it all out. The company sold for $3.5 billion ($3.5B) in 2001! It is inspiring.
TER: Were other companies trying to develop fracking?
JL: The conventional wisdom did not comprehend what George Mitchell was attempting; some folks thought he was crazy. And since some visionaries fail, we need to celebrate the ones who are successful. He grew to be very wealthy as an oilman, but he had also read the book, "The Limits to Growth," and he was very concerned about how civilization is managing the earth's resources.
TER: The extraordinary success of fracking has brought the prices of petroleum products below the cost of production, in some cases. What kinds of adjustments are the juniors that are already producing product in the North American shale field having to make in order to turn a profit, or even to just survive intact until the next boom?
JL: Because horizontal wells cost anywhere from $5–15 million ($5–15M) to drill, the juniors typically need to partner with a larger company. The big companies wait for juniors with nice land positions but not much capital to get desperate; then they move in to strike a deal.
The giant shale plays are not junior friendly, because small firms do not have the hundreds of millions of dollars needed to develop them. Thirty million dollars sounds like a ton of money, but it might only fund two wells. Statistically, it might be necessary to drill up to 10 wells to prove up a play. Typically, it's the majors that develop the new fields, and the juniors try to tag along by capturing acreage in a hot play, and that is often a good strategy. But they can't afford to spend big money to crack the code. They usually look for partners.
Even medium-sized big companies like EnCana Corp. (ECA:TSX; ECA:NYSE) are entering into partnerships with foreign companies and looking for big investors, because the amount of money required to develop these plays is so enormous. In Northeast British Columbia, literally billions of dollars of investment will be required to fully develop the resource. If a junior's land position is compelling enough, it can get a big payday from selling it. The challenge is that there are numerous shale opportunities for major oil companies to pursue and a junior needs an asset that is big enough to move the needle.
TER: For companies with producing wells, what kinds of new technologies are available to increase productivity without hurting already stressed out operating budgets?
JL: There are a lot of technological tricks with minimal costs: A producer can re-enter wells or stimulate wells or fracture older wells. It can enhance oil recovery with pulsed injection of water or chemicals.
TER: How does that work?
JL: A tool installed in the well injects fluids in pulses—pumping like a heart pumps. Think of putting a kink in a garden hose. Pressure builds up and when the kink is released there is a strong pulse of water. This technology is efficient and companies can make money doing enhanced oil recovery with pulsed injection.
TER: What names are on top of that technology?
JL:Wavefront Technology Solutions Inc. (WEE:TSX.V) provides pulsing tools to operations all over the world. It has a couple new business lines with fantastic growth rates. In well stimulation, a chemical (usually acid) is injected into a formation to clean up the area around the well bore so that more oil and gas can flow. By using pulsing, the acid is placed more uniformly and better flow rates are achieved after the stimulation. This part of Wavefront's business is growing very quickly and now accounts for roughly half of the company's revenue.
Wavefront's pulsing technology has been modified for use in performance drilling tools. Fluid pulsing behind the drill bit and drill string agitation dramatically increases the rate of penetration. Reducing drilling time by 20–40% is an easy sell, and the enhanced oil recovery business has a huge market in the field.
In another five years, these technologies will be commonplace, but it takes time since most oil companies are slow to adopt new technologies. It is going to take a few more quarters for Wavefront's revenue to ramp up, but its revenue growth is encouraging and I am quite optimistic about its prospects.
TER: How is its cash position?
JL: It has over $11M in cash. It is very close to being profitable, and it has more than enough money to see it through. The bottom line is that it has a market cap of about $25M and a rapidly growing business.
TER: How is Wavefront's stock performing?
JL: The share price is approaching all-time lows. A couple of weeks ago, I bought more Wavefront shares because it is so cheap. I could be wrong, but the company has staying power, and it is not desperate for cash, so it is a good buy right now.
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