An “Investable” Turnaround In Oil!

After the 2008 market crash, something unexpected happened…

The revolution in oil field technology kicked into gear. During that post-crash environment, directional drilling and fracking moved from niche activities by bold, but quirky companies into the North American oil development mainstream.

It’s all part of America’s big turnaround. Since 2008’s market melt-down we’re a different country. From an energy standpoint, it’s great news for investors…

In 2008-09 it’s fair to say that many things came together, all at about the same time. First, there were enough examples of oil field success in “tight” plays — from the Barnett of Texas to the Bakken of North Dakota and others — that the drilling and operating community was willing to move big money into new tech.

It helped that the post-crash environment offered virtually net-zero interest rates, courtesy of U.S. monetary policy. That is, money was cheap to the extent that operators could borrow. No one (to my knowledge) has really studied the impact of low interest rates on this part of the energy revolution, and we have yet to learn what will happen when rates eventually rise. But the effect of low interest rates is worth understanding, to be sure.

It didn’t hurt that news travels fast in the oil biz, where geologists and engineers have a tradition of sharing knowledge at technical conferences. Overall, the industry quickly developed a grass-roots cadre of technical competence, such that there were more and more people able to perform the operational work and deliver the deliverables.

Meanwhile, key service companies — among them Halliburton (HAL), Schlumberger (SLB) and Baker Hughes (BHI) — were working at breakneck speed to field sufficient tools, pressure pumpers and other equipment to meet demand out in the oil patch. In fact, some companies, like Chesapeake Energy (CHK), even developed their own in-house pressure-pumping and fracking equipment teams.

Along those lines, I recall a comment by the third-generation oilman Scott Tinker during a talk we had about Peak Oil in 2008. He adopted a very pensive, thoughtful look — because he’s a very pensive, thoughtful guy — and said, “There are lots of hydrocarbon molecules out there, locked up in all sorts of rocks. The big question is how to get at them.”

As the next five years would show, Scott’s question had an answer that was truly a work in progress. It was a series of very fortunate events, so to speak.

Things Come Together

Of course, nobody drills a well without owning the leasing rights or title to the mineral claim. And across North America, the mid-2000s were a time for leasing acreage and consolidating land packages. In thousands of counties across dozens of states, courthouses were packed with “landmen” (the term includes women, of course) poring over dusty documents on title racks and stacks.

In other words, innumerable foresighted energy companies put together large plays that offered attractive resource numbers. And what a resource! Informed resource estimates ranged from “billions” of barrels to “trillions” of cubic feet. The potential was mind-bending.

In the olden days — let’s say up to 2008 — most oil wells were drilled the old-fashioned way. That is, drill bits were aimed to land in hydrocarbon reservoirs in classic “oil field” configurations. These are structural or stratigraphic zones of abnormally high porosity and permeability in rock formations, where oil and/or gas has pooled up such that a bore hole can tap into it. That’s the source of most of the world’s oil, and that has been the case for over 150 years.

But new oil field tech — directional drilling and fracking — means that entire rock formations that span many counties (even states) offer the promise of producible hydrocarbon molecules. That, and drilling moved from a speculative investment with a not-insignificant possibility of dry holes to a “manufacturing” model in which building wells has become almost an assembly-line construction process.

Looking back since 2008, the rapid shift to new fracking tech has been the hallmark of the post-crash environment. Today, according to Baker Hughes, about 76% of all wells being drilled in the U.S. are directional — meaning that they’re looking for oil or gas in tight rocks. It’s a stunning turnaround in just five years.

The Other Crash

For the U.S. economy, every barrel of new domestic oil production is one less barrel that the nation imports. Thus, the domestic energy industry’s recovery from the 2008-09 downturn led to a different sort of “crash,” after a fashion. That’s the astonishing drop in U.S. net crude oil imports.

Here’s an illustration of the changing dynamics of domestic U.S. energy versus imports:

U.S. Crude Production And Imports 2013

The way to look at this is that over the past five years, the U.S. economy has grown its internal energy supply by over 2.5 million barrels of oil per day, while net imports have fallen by even more than that. The total net benefit to the nation is in the range of 5 million barrels per day of displaced oil and cash flows.

In other words, let’s use a price of $100 for each barrel of “new” domestic oil and the same number for each barrel not imported. The post-crash oil boom benefits the U.S. economy by keeping nearly $500 million per day within the U.S. economy. There’s $250 million of oil produced inside the country, and $250 million of oil not imported — and that same amount of money not “exported,” so to speak.

Do more math and the direct benefit of oil production and import displacement is $15 billion per month to the internal U.S. economy, or $180 billion per year. All that new domestic oil production is at the foundation of the economy — basic energy and resources, with an aggregate capital investment of over $150 billion per year just in rigs and steel.

All of this certainly makes the Fed’s job easier when it comes to controlling inflation and maintaining the value of the dollar.

Looking Ahead

The benefit of the new internal U.S. oil boom doesn’t just stop at the drill decks, pipe suppliers and wellheads, either. New oil production within the U.S. in just the past five years has spawned all manner of related economic spinoffs.

Think of the increased activity from building new pipelines and pumping stations to move oil from the interior to where the refineries are, mostly along the coastlines.

Or consider the boom in the railway business from transporting tank cars of oil to every point of the compass. This is a major theme in a new series of reports that I just published for paid-up readers.

And consider what the new environment of low-priced natgas means to the future of electric power production as well as to chemical and related industries. Along those lines, consider the benefits to, big U.S. chemical players.

I’m not about to say that the 2008-09 market crash was a “good thing” for the economy, let alone for the oil industry. The crash came close to pushing the U.S. economy into utter disaster.

But since 2008, of all the sectors that have recovered in the U.S. economy — especially compared with those parts of the U.S. economy that still languish — the energy industry has come back super-strong. In the process, the North American oil industry has changed the strategic balance of the world… and it’s all investable.

Thanks for reading. Have a great weekend.

Byron King
Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

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