U.S. Oil Wages War on OPEC

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

Last year, OPEC decided it would try to curb crude oil output in order to raise the commodity’s price. Even though many analysts (including me) had doubts, it looks like OPEC members have managed to cut somewhere between 82% and 88% of the 1.16 million barrels per day they agreed on.

Even the Russians have cut 100,000 of the 300,000 barrels they said they would cut.

However, the U.S. does not intend to participate.

It’s doing just the opposite: A few exploration and production (E&P) companies have been adding new oil drill rigs at a record pace. That’s good news for U.S. investors.

I believe oil will remain range-bound between $50 and $60 per barrel for the rest of this year. After that, I see it possibly heading higher. And the U.S. E&P companies that survived the last price rout (initiated by OPEC) are quite profitable at those levels.

The bottom line is OPEC put many U.S. producers out of business in the last round of the “oil wars.” But the remaining U.S. E&P companies are going to win this round.

That’s because U.S. producers, especially those working from unconventional shale fields, are constantly improving their well yields.

And there’s no better place to look than the Permian Basin.

The Permian now has 295 rigs in operation. That’s almost half of all the land-based rigs (705) in operation in the U.S. There’s a good reason for that, too.

The Permian is like a stack of 14 oil-soaked pancakes. U.S. E&P companies with acreage there are sitting on gold mines.

In some places, you can hit all 14 layers from one drill pad. That makes the economics of drilling there far better than those at deep-water fields or single-layer shale deposits.

The rig count in the Permian has been on the rise ever since the middle of last year.

But it’s technology that’s largely responsible for the increase in new well production.  I’m talking about technology that allows drillers to steer drill bits to follow narrow but productive oil layers for several miles. In addition, the number of frack stages (holes in the drill string) is much greater than it used to be.

And drillers are now using a lot more water and sand when they frack a well. Some wells use an entire unit train (100 carloads) of sand just to frack one well.

It’s no wonder that the average number of initial barrels per day has gone from 50 to 700 or more over the last decade. That’s technology at its best.

There are a number of great E&P companies. But readers know I’m a pick-and-shovel guy. And in the case of frackers, they all need lots and lots of sand.

I like sand providers like Hi-Crush Partners L.P. (NYSE: HCLP) and U.S. Silica Holdings Inc. (NYSE: SLCA). The companies are up 291% and 223%, respectively, over the last 12 months. Can they do it again this year?

I don’t believe we’ll see 200% gains, but we could see 100% gains in either one. They can sell all the sand they can mine.

If oil prices hold up, we’ll see even more well drilling and completions in 2017 than we did in 2016. Investors might want to consider these sand providers for their portfolios.

Good investing,

Dave