3 Can't Miss Quotes From the Oil Patch This Week
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You can learn a lot from company conference calls. Hidden within them are comments foretelling industry trends you don't want to miss. Let's take a look at a few of my favorites from last week and what they mean for investors.
Costs are falling in the Bakken
While rapid production growth takes all of the headlines, one of the more interesting trends is the falling cost of doing business in the Bakken.
"It’s a good time in the basin. We are seeing a lot of things happening. And I think across the board all operators are bringing their well costs down." -- Lynn Peterson, Kodiak Oil & Gas (NYSE: KOG)
Much of these savings can be attributed to a new technique called pad drilling. The concept is simple: rather than complete one well per site, operators use horizontal drilling methods to complete multiple wells from a single location - or pad. The benefit is that operators can drill more wells in less time than they might with just one well per pad.
Pad drilling has been slashing the cost of drilling programs throughout the Bakken. For Kodiak Oil and Gas, average well completion costs have fallen from $10.5 million last year to $9.5 million. The company sees additional savings coming as it transitions more of its wells to pad drilling.
Other Bakken operators have benefited as well. For Continental Resources (NYSE: CLR) - one of the technique's early adopters - average well completion costs has fallen from $9.2 million to $8.2 million over the past year. Management thinks pad drilling will shave another $200,000 off the cost of a well by the end of 2013.
Last train to Bakkenville?
It appears pipeline capacity is finally catching up to production in the Bakken. Producers are increasingly choosing pipelines over rail to ship their crude.
"To give you some perspective on our takeaway optionality, we went from about one third of our production on pipe in June to two thirds on pipe in July. This flexibility has driven our superior results and price realizations as the market dynamic change." -- Taylor L. Reid, Oasis Petroleum
Additional transit capacity means higher crude prices and lower transit expenses for Bakken players. We really saw that play out in every name in the space this quarter.
However, this development could spell an end to the crude by rail boom. Last quarter, Union Pacific (NYSE: UNP) reported that narrowing crude price spreads are slowing demand for rail transit. The company's crude oil volume was up only 3% from the previous quarter, well below the Street's expectations.
During the conference call management also pointed out that tighter differentials don't leave a lot of pricing room for shipping costs, tank car, and terminal fees. Now changing economics are starting to impact operations. During the quarter, Union Pacific had to pull back on short-haul runs from Texas shale and tight oil plays as new pipeline capacity comes online. Investors should be on the lookout for further cutbacks in upcoming quarters.
End of the crude by rail boom
So do narrowing spreads spell the end of the crude by rail boom? Maybe not.
"We think rail has a long-term home in the distribution of crude within North America because of the differences and optionality that it provides you, but it will have to be cost competitive with the pipelines as those come on and as they reach the major refining centers." -- Winston Bott, Continental Resources
Notably Continental Resources - one of the biggest operators in the Bakken - has no intentions of completely dropping rail shipping in spite of cheaper pipeline alternatives. In their view trains are more nimble and agile. Keeping it within a portfolio of transportation options allows Continental to react quickly to changes in the marketplace and exploit opportunities if they arise. That means the company can occasionally secure a higher price for their product than simply sending crude via pipe.
Bottom line - if the industry can become cost competitive with pipelines, rail will maintain an important role in the crude transportation business.
Foolish bottom line
Conference calls are a useful tool for investors. Sometimes they allow listeners to catch a glimpse of emerging industry trends that may have otherwise been missed. This can give the diligent analyst the investment edge.
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Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!