Oil & Gas: Enhanced Recovery
Nothing catches the market’s attention like cushy profit margins. Technologies that enable oil producers to drill more for less money were a notable theme for the experts featured in The Energy Report in 2013.
As Jim Letourneau commented, “Reducing drilling time by 20–40% is an easy sell, and the enhanced oil recovery business has a huge market in the field.”
In an August 2013 interview titled “Smart Fracking: Jim Letourneau on Enhanced Oil Recovery with Competitive Costs,” the Big Picture Speculator editor said, “There are a lot of technological tricks for increasing well productivity with minimal costs: A producer can re-enter wells or stimulate wells or fracture older wells. It can enhance oil recovery with pulsed injection of water or chemicals by utilizing a tool installed in the wells that injects fluids in pulses—pumping like a heart pumps. Think of putting a kink in a garden hose. Pressure builds up and when the kink is released there is a strong pulse of water. This technology is efficient and companies can make money doing enhanced oil recovery with pulsed injection.
“One such company is Wavefront Technology Solutions Inc. (WEE:TSX.V), which provides pulsing tools to operations all over the world. It has a couple new business lines with fantastic growth rates. In well stimulation, a chemical (usually acid) is injected into a formation to clean up the area around the well bore so that more oil and gas can flow. By using pulsing, the acid is placed more uniformly and better flow rates are achieved after the stimulation. This part of Wavefront’s business is growing very quickly and now accounts for roughly half of the company’s revenue.”
C. K. Cooper & Co. Analyst Darren Odenino was more impressed with CO2 Enhanced recovery, a method wherein CO2 is piped to oil fields, where it is injected via injection wells into the oil reservoir. [See infographic below.] The Department of Energy’s Office of Fossil Energy notes that about 114 active commercial CO2 injection projects are underway in the U.S., and together they could produce a collective additional 280,000 barrels of oil per day (280,000 bbl/d).
Among the higher-profile projects is Magellan Petroleum Corp.’s (MPET:NYSE) Poplar Field in Roosevelt County, Montana. In his May 2013 interview titled “How to Spot Oil and Gas Takeout Targets,” Odenino commented, “The exciting catalyst for Magellan is the opportunity to test its CO2-Enhanced Recovery project in the Poplar field’s Charles formation. If that proves successful, Magellan should be headed for a lot of growth.” Magellan has already reached several milestones for this pilot project. With funding secured for a two-year trial run and five wells drilled, Magellan is scheduled to begin CO2 injection this very month.
Evan Smith, co-portfolio manager of U.S. Global Investors’ Global Resources Fund, sees producers moving toward a manufacturing-like process in the coming year with multi-well pad drilling. In an interview earlier this month titled “Producers that Can Pump at $60/bbl Oil,” he commented, “The rig count has declined by more than 50% over the last two years, and yet we continue to see a steadily increasing supply of natural gas. It’s a testament to the technology that has been developed by the industry to drill faster and more efficiently and to unlock and produce more reserves with less input.”
“I think in 2014, people in the field will have delineated most of their acreage and are going to turn these things into a pure manufacturing process with pad drilling. Continental Resources Inc. (CLR:NYSE) is testing 16 wells per pad in the Williston Basin in North Dakota. The company will repeat that pattern and drive costs down. We’ve seen a big shift to multi-well pad drilling in 2013, but I think it’s going to become much more standardized in 2014. The efficiencies that we’ve seen, which have led to more productivity with fewer rigs, will probably remain and perhaps even accelerate in 2014.”
North American oil and gas industry innovation is a force that is turning the global production profile upside down as companies explore new oil and gas reserves around the world that were thought all but unrecoverable. As Edison Investment Research Analyst Peter Dupont commented in his recent interview, “Has Shale Broken OPEC’s Grip?,” North American companies with shale tech know-how are poised to unlock reserves around the world, especially in South America.
“Some of these companies have first-mover advantage.,” says Dupont. “Madalena Energy Inc. (MVN:TSX.V) [is one of] the most obvious examples. . . Madalena has working interests ranging between 35–90% in three blocks in the Neuquén Basin comprising a sizeable 135,000 net acres. Contingent and prospective recoverable resources are estimated by Madalena at 2.9 Bboe, of which 45% are oil and NGLs. There is a mixture of conventional and unconventional plays. Small quantities of oil are presently obtained from the conventional Sierras Blancas formation in the Coiron Amargo Block, where horizontal drilling technology is being applied. Madalena’s key focus presently is to secure a joint venture partner for the appraisal and development of the Vaca Muerta and Agrio shale formations. Securing a partner or partners would be a critical catalyst for the stock.”
Canaccord Genuity Research Director Christopher Brown saw shale tech sweeping the old world, especially in Ukraine. In his November interview, “Four International O&G Juniors for a Globe-Sweeping Shale Revolution,” Brown commented, “On the Ukrainian side, Cub Energy Inc. (KUB:TSX.V) has done well at introducing new technologies to the country. Cub has received the approvals to bring in this new technology and apply it. It’s going to be a slow process, but as the company continues to unlock value, there’s no denying that its region and fiscal terms are very good and provide a lot of incentive to keep on working hard to grow the production base. Turkey hosts a more difficult unconventional basin. The Anatolia Basin is still in its earlier stages, whereas the Ukrainian assets have some proven opportunities. In the Anatolia Basin, you do have some majors that are tentatively playing around the edges, but there has not yet been anything that’s really unlocked that basin. But it didn’t cost Cub much to enter the basin and the Turkey play provides shareholders with potential future value, which they don’t pay for at Cub’s current share price.
“. . .History has proven Ukraine has access to significant volume. That’s why Cub is in this country: It believes it can unlock more value. . .through its ownership in a separate private holding company (Pelicourt Ltd.), management holds a major position in Cub Energy, and recently it decided to put in additional dollars to show confidence in the future of Cub. As of its last statement in October 2013, it owns 39.54% of the shares outstanding. That’s provided a decent amount of market support.”
Uranium: Fundamental Changes
With the Megatons to Megawatts program officially coming to a close, investors are shifting focus to North American uranium producers that can help meet U.S. needs. John Kaiser‘s October interview, “10 Strategies for Success in a Flat Commodity Price Market,” was filled with fresh approaches to mining. In light of the small number of domestic uranium producers and the high capital costs of resource delineation and mine development, an innovative new sampling method caught Kaiser’s attention.
He comments,”A junior explorer, Uravan Minerals Inc. (UVN:TSX.V), has developed an interesting geochemical sampling method it is using on projects in the Athabasca Basin. . .Uravan has spent the last five to six years developing its geochemical sampling method in collaboration with Queens University’s Kurt Keyser, which looks for the lead isotope decay products of a uranium deposit. These get absorbed by vegetation and clay particles. The company takes tree core samples at surface to find evidence of a resource that may be 1,000–1,500m deep. You still can’t tell the size of it or the grade, but at least you know you’re going to hit something once you drill down there.
“This approach opens up a much deeper portion of the basin that has been largely out of bounds because of the difficulty in finding these deposits, which almost always are right at the unconformity between the basement rocks and the overlying sandstone rocks in association with graphite. The conventional targeting tool is a geophysical survey that looks for conductors representing these graphite beds. But deeper than 450m, these conductors become fuzzy just as drill holes that need to pinpoint the target become expensive. This is problematic because most of the graphite beds at the Athabasca Basin unconformity do not host a uranium deposit. Uravan’s radiogenic isotope based sampling tool allows the junior to see evidence of a uranium deposit at substantial depth from the surface. A case study done this summer apparently demonstrated that Cameco’s 850m deep Centennial deposit shows up as a well-constrained geochemical anomaly. Theory says that in the Athabasca Basin, the thicker the sandstone cover, the bigger and richer the potential uranium deposit at the unconformity. Uravan now has a tool that enables it to stalk super-elephants in uncharted territory.”
Kaiser continued, “Uravan can also perform this research as a service to companies that have claims in the Athabasca Basin and then earn a royalty or a small interest in exchange for generating the geochemical part of the target that you need to justify raising money for a high-stakes drill program.” Earlier this month, Uruvan completed another surface geochemical study on the Centennial deposit based on the earlier survey.
The Abasca Basin is in the spotlight more than ever this year, as superstar company Fission Uranium Corp. reported countless startling results. As Kaiser noted, “A big discovery event in the past year is the Patterson Lake South discovery in the Athabasca Basin by Fission Uranium Corp. (FCU:TSX.V) and Alpha Minerals Inc. This is a classic high-grade unconformity type of uranium deposit with grades of up to 20% uranium. The size of this discovery is stimulating interest in the potential for a new Athabasca Basin area play.”
Of course, other domestic near-term uranium producers are raising eyebrows among energy analysts, especially those who expect a uranium price comeback in the coming year. Cantor Fitzgerald Canada Metals and Mining Analyst Robert Chang highlighted Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT) in his September interview, “Uranium Price Headed for $50 in 2014, Taking Stocks Higher.” Chang commented, “We cover Energy Fuels, which is the second largest producer of uranium in the U.S. and probably has the best story leveraged to the uranium price. It currently produces only about 1 Mlb/year, by design, with several mines that can be turned on relatively quickly. We estimate that it could quickly turn on anywhere between 2–5 Mlb more in annual production once prices get to attractive levels. On top of that, it also has the White Mesa mill that it acquired from Denison, located in Blanding, Utah, which is the only conventional mill in the U.S. Having mill access is extremely important because you effectively cannot produce your final product without it. Energy Fuels has a monopoly position with a conventional mill and it can even make money by processing material on a toll basis for other producers. We believe that this is a very attractive company for those who believe that the uranium price will head higher.”
Meanwhile, the way that we consume nuclear power could completely change over the coming decades. In his recent interview, “Why Uranium and Coal Rank high for Energy Return on Energy Invested,” Thomas Drolet commented on a coming shift to smaller units: “Standard nuclear reactors being built today are gigantic units. Over the next decade we’re going to see a shift to smaller units—small modular reactors (SMR)—for good and valid reasons of schedule and because the utilities want them. Babcock & Wilcox Co. (BWC:NYSE) and NuScale Power LLC in the United States are being funded or potentially funded by the U.S.DOE to bring on these smaller reactors.”
What’s particularly exciting about stories like these is that they are larger than a single company. They have the potential to galvanize an entire sector and make a particular energy source more viable, period. Keep tuning in next year for more investment advice about uranium producers.
Alternative energy as a sector is built on technological innovation, but in order for the market to take notice, these innovative feats need to create a compelling bottom line. Rodney Stevens took notice of an innovative solar energy business model in his July interview, “A Short-Seller’s Investment Guide to Obama’s Climate Change Initiatives.”
Stevens commented, “We like SunPower Corp. (SPWR-A:NASDAQ; SPWR-B:NASDAQ) because not only does it manufacture the solar panels, but it also has a leasing program for the retail space, similar to SolarCity. SunPower has one of the best products available on the market and it should benefit from the incentives utility companies have to add renewable sources of energy to their business. SunPower could play a big role in the utility space, but also grab the retail markets. It should benefit from the growth in solar and also it has an international base, although its operations are primarily in the U.S. . .I think decent quarterly results drove the stock. Its revenues beat expectations and its losses have narrowed. Going forward, SunPower is staged for further growth and profitability. I think that’s been the main catalyst driving the share price. We expect that revenue growth to continue. “
House Mountain Partners founder Chris Berry made a strong point in his June interview, “Transformative Energy Technologies.” As Berry notes, “With population increasing globally, becoming more interconnected, and set to live a more commodity-intensive lifestyle, sustainability and efficiency in our progress as a society will be of paramount importance. I just do not believe that you can have as much intellectual capital and financial capital all working toward next-generation technologies and not have breakthroughs that provide compelling investment opportunities and also leave our children a lasting legacy.”
From production technical advances to futuristic visions of mega-efficient energy delivery systems, the energy investment space is vast, varied and tremendously exciting. And if you’ve ever watched a company start small and grow into a major market force, you understand the power of ideas. We hope you’ll keep checking in with us for energy investment discussions from esteemed experts in the field, and let us know what you’d like to see more of from The Energy Report. Happy holidays, and many happy returns!
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( Companies Mentioned: BWC:NYSE, CLR:NYSE, KUB:TSX.V, EFR:TSX; EFRFF:OTCQX; UUUU:NYSE.MKT, FCU:TSX.V, MVN:TSX.V, MPET:NYSE, SPWR-A:NASDAQ; SPWR-B:NASDAQ, UVN:TSX.V, WEE:TSX.V, )