Oil and Gas Companies Expanding to Meet Rising Demand
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The worldwide oil and gas exploration and production industry is expected to grow by 3% this year to $4.5 trillion. According to the Energy Information Administration, global demand for oil will grow by 0.9 million barrels per day this year and 1.2 million barrels per day in 2014. To meet this increasing demand, companies in the industry are adopting new technology to increase their production, mainly by investing in the ability to extract oil and gas from unconventional geographical formations called shale.
Here are three companies in the industry that have sustainable opportunities in the upcoming years to enhance production with their resources. These companies are adopting different strategies like improvement in infrastructure and increasing drilling activities to pace up their production.
Central compressor and new rig
Cabot Oil & Gas (NYSE: COG) is expanding its infrastructure in Marcellus with the commissioning of a central compressor station. A compressor station is a facility that helps the natural gas transportation process by feeding gas into pipelines. This station will help in reducing field pressure and will allow existing wells to flow stronger. It will also act as a major discharge station into Cabot's constitution pipeline, which will be operational by March 2015.
This expansion will help in expanding gross capacity to approximately 2 billion cubic feet per day, or Bcf/d, this year and 2.9 Bcf/d next year compared to a current capacity of 1.4 Bcf/d. This will help the company generate higher revenue in the future.
The company currently operates five rigs, and is planning to bring a sixth rig in the Marcellus Shale by the end of the year. This additional rig will help in increasing the company's well-drilling capacity. With this rig, Cabot's wells drilled per year will increase from around 85 to approximately 100. This will foster a 20% improvement in well recovery compared to 14 billion cubic feet equivalent, or Bcfe, of proved reserves last year. The company can expect to increase production of around 349,000 Mcfe/d in the Marcellus region. With this, the total production will rise to 1,079,715 Mcfe/d from 732,279 Mcfe/d in the last year.
MLP and strong growth in Permian Basin
On June 6, Devon Energy (NYSE: DVN) announced a plan to form a master limited partnership, or MLP, for its midstream assets in the U.S. An MLP is a limited partnership that is publicly traded on a security exchange. This partnership combines the tax benefits of limited partnership with the liquidity of publicly traded securities.
The newly public traded company will own a minority interest in the company’s natural gas gathering and processing assets in Oklahoma, Texas and Wyoming. Devon Energy will retain distribution rights and hold a majority of partnership units.
It is expected that Devon Energy's MLP will file registration with the SEC in the third quarter of 2013. Devon will initially sell 10% of its units following its IPO, which will bring $450 million in cash that can be used in its continuing operation in the Permian Basin and the Mississippian.
The MLP is the first move in restructuring; the company has another restructuring option in the sale of its Canadian assets. These assets are valued around $6 billion - $8 billion. The company can go for a partial or outright sales of these assets. The cash generated from either of these restructuring plans would be used in a buyback to increase investors’ confidence. A share buyback of $2 billion - $3 billion is possible in the near to medium term.
The company delivered strong oil production growth in the first quarter, driven by gains from the Permian Basin. The output in this region increased 24% quarter-over-quarter, representing 60% of the company’s 68000 Boe/d oil production. Currently, there are 29 rigs in the Permian region, and the company is planning to spend $1.5 billion. It is expected that the company will drill around 300 wells this year. With the increasing wells in this region, its U.S oil production will increase by 40% year over year in 2013.
Production growth in the Scoop region and pad drilling in the Bakken region
Continental Resources (NYSE: CLR) is the largest acreage holder in the Bakken region, and is working continuously to make improvement by developing its drilling method. It is adopting pad drilling, which allows the drilling of multiple wells more efficiently, as it reduces the time taken to move from rigs to well locations.
Continental has decreased its rig count to 20 from 22 as more of its rigs are switching to pad drilling. About 70% of rigs in Bakken are on pad, helping to improve efficiency with lower cost. The well cost in the region declined to $8.3 million this quarter from $9.3 million in 2012 due to pad drilling. The cost will further reduce to $8.2 million by the end of the year. This drilling method will help it to complete 245 net wells, up from 226 estimated in February.
The company currently operates nine rigs in the Scoop region, and is planning to increase its rig count to 12 by the third quarter of the year. It is also planning to reduce well operating costs by $0.5 million by the end of the year, down from the current cost of $8.5 million - $10 million. With the savings in well costs in the Scoop and Bakken regions, the company plans to drill 55 net wells this year, compared to a February estimate of 41, without any incremental capex.
The production in Scoop increased 100% quarter-over-quarter to 14.2 million barrels of oil equivalent per day, or MBoed, in the first quarter. Looking at strong performance in first quarter, it is expected that total production will rise to 136.5 MBoed with 40% year over year growth this year.
Cabot's Oil & Gas infrastructure expansion with a central processor and an additional rig will increase its well drilling capacity.
Devon Energy’s MLP and output growth in the Permian Basin provides good prospects for better future growth.
Continental Resources' growth in the Scoop region will enhance overall production, and cost reductions from pad drilling in Bakken will improve efficiency.
All three of these companies are buys.
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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!