What’s Fessler’s “Barrel of Oil Six Times Cheaper Than Water?”

Sniffing out a teased stock from Peak Energy Strategist

By Travis Johnson, Stock Gumshoe, July 23, 2014

David Fessler hasn’t gotten much coverage in the pages of Gumshoe for quite a while, so when he started teasing about a company that he thinks will have gains of more than 100% by year-end… and that he thinks can produce oil for 28 cents a gallon using “Futuristic Technology … it seemed tailor made for today’s teaser solutionizing.

Which is not to say that that 28 cents a gallon number is meaningful — he talks about drilling technology like drilling multiple horizontal zones from one rig, and having multiple rigs on one pad, so presumably that means “lifting costs” (not exploration costs, or processing/midstream/upstream costs).

There are 42 gallons in a barrel of oil, so at 28 cents a gallon that would mean the direct production/lifting costs are about $11-12 a barrel. Which as of a few years ago was fairly average for onshore production in North America — it may not be average any more, with fracking and horizontal drilling continuing to be quite expensive, but from my quick back-of-the-envelope math it’s not outlandishly cheap. And implying that actual drilling/lifting costs are the only expense for an oil producer is pretty misleading — finding the oil, paying royalties or leases, shipping the oil, all add substantially to any producing company’s costs.

But anyway, which company is he teasing? Here are some more clues:

“… this Oklahoma company is utilizing a technology more efficient and cost-effective than anything I’ve seen in over 37 years of following the oil business.

“In some instances, technology like this allows oil companies to tap up to 18 wells at once with a single rig.”

OK, so that seems to be generally teasing the more efficient drilling that most companies are pushing toward to minimize the number of pads they need and hit multiple horizontal shale zones from one rig. Which isn’t a technology or technique that any one company owns, as far as I can tell, though some rig companies may have technological advantages or more capable products.

More from Fessler:

“I’ll get into the specifics of the technology in a second… But here are the key reasons why it severely cut this company’s production costs…

“First, it can increase output on a well by up to 600%.

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“Second, it reduces the time to move to a new site from one week to less than a day!

“Third, it drastically cuts production costs.

“And fourth, it reduces the number of workers needed by up to 40%.

“Combine all these improvements, and the end result of this new technology is it can now produce oil at just $0.28 a gallon… or just $12 per barrel.

“By comparison, it costs Exxon an estimated $20 per barrel, Orinoco $30 per barrel and Horizon Oil Sands $40 per barrel!

“In other words, it can do it up to 70% cheaper than major oil companies.”

I haven’t checked those numbers, but I doubt they’re directly comparable — I don’t know what Exxon’s costs are, but Orinoco is Venezuela’s heavy oil that obviously costs more than light, sweet crude to produce, and oil sands likewise are very expensive to produce whether the sand is mined or melted. It may be that this “secret” company produces oil cheaper than some, but don’t assume that they’re doing something unique that means they produce oil 70% cheaper than companies that are actually comparable.

More from the ad:

“This company is preparing to use this technology on a new find one expert calls, ‘the second-largest oil discovery in the history of the world.’

“Located inside the continental U.S., it’s one of the few spots beneath the Earth’s surface that is literally oozing with billions of barrels of oil….

“This is nothing short of a Eureka!-type discovery… so HUGE that the CEO of the company refuses to call it a ‘finding.’

“He prefers to refer to it as a ‘prize.’

“Bottom line: This company is sitting atop the richest find in U.S. history, with the technology to bring it to market at prices unheard of in the energy industry….

“… investors are set to make an absolute killing when this story goes mainstream.

“In fact, for reasons I’ll get into, I expect an announcement to hit August 8 that will do just that.”

Then just a few more clues for you…

“Founded just eight years ago in 2006, this tiny Oklahoma company at first tried its hand in lots of different oil projects…

“With far-flung operations stretching across a couple of different states in the country’s heartland….

“Each venture was doing relatively well, but nothing big yet.

“Until it hit a breakthrough in the area I’ve been talking about today….

“The decision on what to do next was clear.

“Move every resource it had into the operation.

“‘The data speaks for itself,’ the CEO said. ‘It shouts out loud.’

“So it sold off its assets for $438 million in May of last year, to focus all resources on this one project.”

And there are several photos that turn out to be lifted from one of the company’s investor presentations, so just in case the Thinkolator needed any help (“it did not!” comes the indignant answer), we can confirm that Fessler must be teasing: Laredo Petroleum (LPI).

Which does indeed try to maximize drilling efficiency, and which did sell their non-Permian assets to Enervest for $438 million so they could concentrate on their large permian basin/Midland assets, apparently focusing on the Wolfcamp and Cline shales. You can see the full story of what they’re doing and trying to do, including talk about their advanced rigs and drilling efficiencies, in their investor presentation here if you want something a bit clearer than Fessler’s hype-y sales pitch.

Laredo has come up in passing in several past articles, but I’ve never looked at it in detail and I don’t think it’s been the target of a big teaser campaign before — at least, not one that I’ve noticed. Fessler certainly isn’t alone in liking them, though, they’ve been a growth darling of late as production has ramped up in the Permian and have even caught the attention of Investors Business Daily for their recent earnings “beat” and other pundits have called them out for the earnings growth potential from their “stacked” plays in the Permian — such as in this piece from the Motley Fool earlier in the month.

It’s not tiny — they have a market cap of about $4 billion — and it’s already profitable and is drilling in a hot areas with lots of discoveries and reserves, so this is arguably priced at a premium because of their growth rate and it’s certainly risky since it’s an oil play and depends on drilling success, but it’s not a penny stock exploration stock that will rise or fall on the results of one well like so many of the junior oil names we see teased.

And that’s about all I know about them — analysts are forecasting solid growth and they’re trading for about 24X earnings, so if you’re looking for a midsized oil producer with good growth numbers and the ability to tell a good story, Laredo’s another one to toss on your pile of candidates. Let us know what you think with a comment below.


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carbon bigfoot
carbon bigfoot
6 years ago

Save your money. Wet dreams all.

john
john
6 years ago

Travis,

There has been no new technologies in drilling of a revolutionary nature for 15 years or so. I have some experience here having owned a company whose IP was central to the analysis and development of horizontal and directional drilling in an offshore / pad environment during its early days. The former is of course a ubiquitous technique in the North American shale plays. Horizontal drilling, pad drilling, multi-laterals and multi-stage fracking are end developments of techniques that are now decades old. No surprises are to be expected from an investment standpoint as I think you have already concluded.

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RT
RT
6 years ago
Reply to  john

For something REAL, there is a company with a BLADE-LESS TURBINE that can desalinate salt water – and produce large amounts of clean (distilled) water from any salt or polluted source while generating electric power at the same time from the clean, free heat of the sun – all for less than what we are pay now for just electricity from filthy coal. They have a program for ownership of lenses in their power plant at NO cost – tax savings cover more than the cost, with rental income – info and contact here: http://powertaxcredit.com

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540
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arch1
6 years ago
Reply to  RT

If you really believe that pitch you should put all your money into it,including all you can borrow. For my part I choose to pass on the “opportunity” that “could” be so rewarding.
Please send diagram of bladeless turbine.

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Ron Ames
Ron Ames
6 years ago

Thanks Boss-man;
I just spent about a half hour listening and the same researching…to come up with what you got for “US” in 30 seconds. That’s why I stay an Irregular.

Ron Homan
Ron Homan
6 years ago

Looking at the annual report of a Canadian oil company I own, they quote operating cost of $19 to $20 per barrel , and SGA expenses of $3 per barrel. There is no way of knowing what costs are included in his $12 per barrel for Laredo but I doubt it is all inclusive.

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quincy adams
quincy adams
6 years ago

According to my last bill, I pay 0.3 cents per gallon for water, or 12.6 cents per barrel. To be 6X cheaper, the oil must be produced @ roughly 2 cents per barrel. Does the years-old “new” technology come with new math, too?

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John Lincks
John Lincks
6 years ago

Frank Curzio recommended LPI in Oct 2012 @ 19.96. Currently a hold with a “buy up to” price of $22.50

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sooku
6 years ago

So it reduces COGS by half to a quarter– but what is the effect on EPS?

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arch1
6 years ago

Travis I am sure you are correct. There is no new technology out there that can reduce costs as touted. There is/are a limited number of ways to put a hole into the ground and pull out oil.

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[…] What's Fessler's “Barrel of Oil Six Times Cheaper Than … http://www.stockgumshoe.com/There are 42 gallons in a barrel of oil, so at 28 cents a gallon that would mean the direct production/lifting costs are about $11-12 a barrel. Which as of a few years ago was fairly average for onshore production in North … […]

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