This will be one of the most important missives I will ever write.
The future of fracking is re-fracking.
This cutting-edge technology is new, and I’ll walk you through everything you need to know about the next game-changing technology in the shale revolution. Some will call it Fracking 2.0., but I call it Re-Fracking.
Adversity is understating the potential headwinds heavily indebted oil and gas companies face as 2015 begins, oil prices stay suppressed, and hedges on their production eventually wind down.
Adversity always results in innovation in the top oil and gas producers, operators, and servicers in the industry in every downturn.
In 1956 Marion King Hubbert, a geoscientist from Shell, predicted peak oil production would be reached between 1965 and 1970. He became famous when his prediction became reality in 1970.
But everything changed when the innovations in horizontal drilling and fracturing allowed companies to recover oil and natural gas from new and deeper formations such as the Bakken, Eagle Ford, and Permian Basin at the dawn of the 21st century.
Hydraulic fracturing has experienced many innovations, such as increased lengths both vertically and laterally as well as new completion designs which have increased fracture stages along the well and perforations (number of fractures) between each cluster stage, to name a few.
I prefer to spell the shorthand for hydraulic fracturing as “fracing,” because it’s an adaptation of the word “fracturing,” which is what happens to the formation of rock. But mainstream media, Microsoft Office Word 2013, and most important, my proofreaders disagree. The latter tell me it should actually follow some rule involving a part of speech called a “gerund” and get the “k” added. It’s a battle I don’t care to fight (I care about making money, not academic nonsense), so fracking will be the spelling in Casey publications moving forward. Whether you read the word fracking, fraccing, or fracing, they all refer to hydraulic fracturing.
But in the oil patch, you either innovate or disintegrate.
The need to bring down costs and increase the recovery of oil and natural gas is now a prerequisite to stay alive in the oil patch during a major price correction, such as we’re currently in. The need to modify drill and production programs to be efficient is greater than ever.
Companies will focus on increasing the number of wells per pad and down spacing, which allows producers to increase extraction efficiency by reducing the length between wells on a per acre basis. But I believe the greatest efficiency and success of this downturn will be re-fracking.
In the next few years, you’ll very likely be hearing a lot about re-fracking… and it will likely also become as common as fracking is today over that time frame.
What is re-fracking?
Essentially, rather than drilling a new well, a company re-enters and re-fractures existing horizontal wells. This can be done currently at about 25% of the cost; that cost will only improve with more “re-fracks” and as better techniques develop with time.
Now that oil has fallen to new lows and management teams are coming to the realization that prices aren’t going up anytime soon, oil producers need to find ways to reduce drilling costs and increase production (recovery) from existing wells.
I believe that one of the absolute best ways to do this is to eliminate as much of the drilling costs of a new well as possible and focus on re-entering an existing well. By applying better modern technology and better equipment, the company can re-frack the older horizontal wells to unlock the trapped oil and natural gas left behind in the initial frack process. And there’s a lot of oil left behind in the existing fracked wells.
Bam! Innovation out of necessity.
Re-fracturing horizontal oil wells is new to the industry, but I think it will actually revitalize the declining wells in the shale sector. I’m not saying that the re-fracked wells will be better than the original fracked wells initially, but thus far, the future is very promising for re-fracks based on the results I’ve seen.
Not only can re-fracking revitalize these declining wells, it can also increase the companies’ drilling inventories significantly, which is a huge positive. “Drilling inventory” is the number of potential wells per section. More wells means more reserves, which is good, especially if the cost to re-enter those existing wells is one-quarter or less the cost of drilling a new well.
Now I know there will be an old guard—the same guys who in 2007 and 2008 told me that fracking is science fiction—who won’t believe in re-fracking, but that’s their problem. I’m already planning how I am going to position myself and my subscribers to take advantage of this trend that no one is talking about.
One of the first companies to test re-fractures is Marathon Oil Corp. (MRO) in its core Bakken acreage in Mountrail and Dunn Counties.
So, we called the company up and starting asking questions. They really didn’t like the fact we came knocking and didn’t want to give out much information, as this is cutting-edge stuff, and the company has a leg up on its competition.
But anyone who knows me knows I don’t give up easily, so I got the story… and it gets very good.
The re-fractured wells significantly outperformed expected results.
In the third quarter of 2014, Marathon Oil completed 13 re-fractured wells, all with very positive results. So I kept the search on for other management teams that have the know-how to deploy re-fracks.
I called Pioneer Natural Resources (PXD), one of the true pioneers in the early days of the Eagle Ford shale in Texas. PXD is seeing major success using re-fracking the Eagle Ford.
I didn’t stop there. I have the whole list of who’s re-fracking and who isn’t. But that information is for my paying subscribers.
That said, I’d be remiss if I left out my fellow Canadians and failed to mention that the Canadian companies such as Crescent Point Energy (CPG.TO) are not too far behind this new re-fracking trend. CPG will begin re-fracturing its Alberta Bakken wells in 2015.
Who will really benefit from the re-fracking boom? I think I nailed this one… and it will be the basis of my March Casey Energy Report newsletter.
I spoke to one of the world’s leading minds in well re-fracking recently, to pick his mind on where the industry is currently and where it will be going in a few years. His insights and experience are incredible.
This executive was one of the final candidates to be the president of one of the world’s largest service companies; and after not getting the nod, he left the company (into which he’d put over 30 years of service) and formed a multibillion-dollar fund which is now capitalizing on the new enhanced oil recoveries. I also plan on making money for my Casey Energy Report subscribers with it.
The reason for the recent emphasis on efficiency is due to the adversity facing oil and gas producers, with lower oil prices and a business model built upon levered growth. Many companies have over-accumulated debt to fund growth projects, and as oil prices fall, they must look to efficiencies to keep growth alive or keep existing production stable. Shale wells face production decline rates ranging from 50%-85% in some wells of the three main formations. Therefore, US shale producers have to keep drilling just to maintain production and continuously pay out large interest payments to their debt holders. These interest payments are burdensome on the profitability of producers, but if they even slow production, their interest payments would be at risk at $50 oil. Looking at the large and small producers in the three main basins in the US, we can see how much these interest payments can cost a company as a percentage of operating profit.
If highly levered US producers were to cut production, their interest costs could rise to greater than 50% of their operating profit and would put the company at risk of default. If that happens, debt is likely to dry up, and lenders would tighten lending restrictions on these companies.
US companies are using down spacing, pad drilling, and re-fracturing as a way to stabilize and grow production while cutting costs in order to avoid accumulating additional debt or seeking additional credit facilities to fund their production.
The United States is a place that fosters innovation. With companies like Google, Apple, and Tesla, it’s easy to overlook innovation in the oil and gas industry. As oil and gas producers face the adversity of low oil prices and high leverage, they rely on the main characteristic that birthed the shale revolution: innovation.
The Saudis may be dictating the price of oil currently to fight for international market share, but oil production from shale formations will not be destroyed, as OPEC hopes it will. The US oil producers will continue to pump record amounts of crude, not because they want to, but because they have to—and having to do something spurs the type of innovation we’re seeing in the oil and gas industry today.
The future of fracking is re-fracking, and we’re on the cusp of what will be the next phase of the US Shale Revolution.
The current energy markets are volatile, but a speculator must use volatility to his own advantage to build positions in companies that have suffered as a result of the current market correction.
I follow a very disciplined approach and use very advanced mathematics and technical knowledge to position myself in the best energy companies.
If you’re looking for in-depth research, experience, and exposure to my vast network in the resource sector, then you may want to pay attention to what I’m doing. If you believe that to be successful in the resource sector one must be a contrarian to be rich—as I do—now is the time to become engaged.
Come see what I’m doing with my own money. You’ll get access to every Casey Energy Report newsletter I’ve written in the last decade, as well as my next two monthly reports, which will not only cover the potential of re-fracking, but will reveal which companies will be best situated to make their shareholders money in the current depressed energy market.
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