Getting the Market Right: David Fessler Explains Oil Well Metrics

Steve McDonald
by Steve McDonald


Steve McDonald: Our guest this week is David Fessler, The Oxford Club’s Energy and Infrastructure Strategist, and he’s here to talk about continuing growth in initial production in oil - something I’ve never even heard of, Dave, to be perfectly honest.

Welcome. How are you?

Dave Fessler: I’m doing great, Steve. How are you?

SM: Great, thank you.

So, as you know, what we try to do every week is share an idea with our viewers about something that they can use to help pick energy stocks. And you’ve picked this topic that - I have to be perfectly frank - I’ve never heard of.

So what is it? How does it affect your decision-making?

DF: Well, Steve, when I’m looking at potential companies that I want to invest in in the oil patch, one of the things I look for is what you just said: continuing growth in initial production rates (even I have trouble saying it).

And what that is... is when these guys drill a well, the initial production rate is X amount of barrels per day. And they measure that initially to get an idea of the performance of the well.

And what I like to look at, quarter over quarter, is how much that is increasing on their average well. Because what that’s telling me, everything else being equal, is they’re using technology to their advantage to increase their initial production rate.

And the initial production rate is an indication that they can extrapolate out to give what’s known as the estimated ultimate production rate for the well. So they can look at the initial production rate, and they can say, “Okay, over X amount of time, we know this well is going to produce X number of millions of barrels of oil.”

And they’re using technology to increase these initial production rates. And it’s absolutely amazing what they’ve done over the last four or five years.

SM: So this is really a measure of what technologies they’re using or how much they’ve improved. Is that correct?

DF: That’s correct. And the types of things that they’re doing... In a horizontal well, they’re increasing the length of the lateral.

The average lateral is now 2 miles. So they drill down vertically to where they’re slightly above the oil-bearing layer, and then they start curving the bit to the point that when they get to the oil-bearing layer, their bit is facing horizontal.

Then they drill sideways 2 miles. And they then frack the well in smaller and smaller increments, and they use more and more sand per fracked stage.

And this all has the effect of increasing the initial well production rate, as you might imagine. The longer you drill, the more oil you’re going to get out, everything else being equal.

In addition to that, they’re fracking the holes that they punch in the side of the casing. They make those closer together. They do this all in stages; they’re doing more and more stages in the same given length of well pipe. So it all adds up to more and more –

SM: More oil from one well, yeah. Where can our viewers go to get this number? And give us some parameters on it.

DF: Well, it takes a lot of digging, quite frankly. You’ve got to go into their data that they publish, their quarterly statements...

Sometimes they will publish this. Sometimes it won’t be in those statements, and it will be in a monthly report, where they go out on the road to talk to some of their big investors. They’ll put together a special report, and it’ll be in there.

So you really have to look around to find these numbers. But it really, to me, is a great indicator, and it’s proven itself to me over time to be a good one.

SM: So they can [sometimes] get it from the quarterly reports. What if they call Investor Relations? Will they have that?

DF: Well, typically unless they’re well-known to the guy on the other end of the phone, they’re going to get blown off. So yeah, the answer is no. They’re going to refer them to a report or a quarterly report.

SM: But they can steer them to the report that they need.

DF: Yes.

SM: Okay, well that works. Dave, thank you so much. I’m going to say it one more time, even though you couldn’t say it either: “continuing growth of initial expected production.” Is that correct?

DF: Continued growth of initial well production.

SM: Well production. Great. Dave, as always, thank you so much for your insights.

DF: My pleasure, Steve.

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Another Great Oil Play From the Club’s Expert

As subscribers to Oxford Resource Explorer know, Dave is the Club’s expert on all things energy and infrastructure related.

He has a wealth of knowledge about the companies that extract oil and gas... but some of his favorite investment plays in the sector are companies that transport and store oil and gas.

TransMontaigne Partners L.P. (NYSE: TLP) is a good example. Here’s Dave checking on the pick in late August...

While small in size, TransMontaigne Partners L.P. (NYSE: TLP) is a cash-generating machine for its unit holders...

The master limited partnership (MLP) owns and operates pipelines and refined petroleum tank farms. We’ve had it in the Foundation Portfolio since August 2016.

It’s by no means one of the biggest MLPs out there, but it’s one of the best.

TransMontaigne’s second quarter was another one that delivered record revenue, earnings and distributable cash flow. Revenues were $45.4 million, up 10.5% year over year. Earnings per share were $0.70, beating expectations by $0.02 per share and second quarter 2016 earnings by 24.7%.

Its distribution coverage ratio was a very healthy 1.62 times. During the second quarter, TransMontaigne brought the final 800,000 barrels of new tank capacity online at its 2-million-barrel Collins Phase 1 expansion.

Its income has nothing to do with the price of oil. That’s one of the reasons I like it.

This is one income play you should definitely consider for your energy portfolio.

- Samuel Taube with Dave Fessler

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