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The Monster Frac

Posted October 31, 2016 at 6:24PM

Saudi Arabia bet wrong when it bet against American oil innovation. It turns out U.S. fracing companies can make money at $50 a barrel oil.

In decades past, Saudi Arabia has maintained its high levels of oil production in order to shut down other higher-priced wells. This game plan worked — most notably in the early 1980s and late 1990s. The Saudis tried again in 2014, when they kept producing in the face of global surplus and cascading oil prices.

The idea is that once its competitors are forced out of business, Saudi Arabia gains market share and drives up the oil price yet again. But this time it didn't work. The U.S. fracing industry is able to compete at a lower cost. It is doing it by creating bigger fracs and drilling extra-long “superlaterals.”

But first, a little background...

Sand is known in the oil and gas industry as proppant, and it is the hot new commodity. In today's energy markets, it's all about the need to improve efficiency, and nobody is better at hydrocarbon innovation than those engineers in the American oil patch.

When it comes to oil production, more sand is better. Introducing: the monster frac.

Hi-Crush Partners (NYSE: HCLP) Sand Mine:

hcsand

In just one example, Chesapeake Energy (NYSE: CHK), one of America’s biggest shale firms, increased production by 70% by pumping 50,185,300 pounds of sand down a well.

Chesapeake called it Prop-A-Geddon. That’s 25,000 tons of sand. In comparison, before 2012, the company used 1,500 pounds of sand per foot. “Prop-A-Geddon” forced more than 3,000 pounds per foot in a natural gas well in Louisiana.

Bloomberg reports:

The super-sized dose of sand — known as “proppant” — is able to prop open bigger and more numerous cracks in the rock for oil and gas to flow.

“What we’re doing is unleashing hell on every gas molecule downhole,” [Chesapeake's CEO Jason] Pigott said.

Shale drillers aren’t holding back in North American shale fields, where the average amount of sand used for each well has doubled since 2014, according to Evercore ISI. At the same time, the length that wells are drilled sideways underground has grown by 50 percent, and the number of zones for hydraulic fracking are also up by half. Each zone of the well isolated for each frack is also growing larger as service companies attempt to break down more of the oil-soaked rock into rubble and cram more sand into the crevices for the hydrocarbons to escape.

This means fracing companies can get more oil and gas out of a given well just by using a lot more sand. This also means they can produce more from their big wells and lower costs.

More Trains

Obviously, proppant producers like Hi-Crush (NYSE: HCLP) and U.S. Silica Holdings (NYSE: SLCA) have been moving up on this new trend. But there is also a need for more trains.

Halliburton (NYSE: HAL) and U.S. Silica Holdings, Inc. recently announced that they were moving the world's largest amount of sand, nearly 19,000 tons, from Ottawa, IL, to Elmendorf, TX. The train was the largest frac sand unit of its kind shipped to date in North America, and it arrived via the BNSF railroad.

It was received at the Halliburton Elmendorf South Texas Sand Plant, which can handle two 115-car unit trains simultaneously and can hold 40,000 tons in its eight silos.

Superlateral Wells

The other hot trend in reducing frac well costs is the superlateral well.

Eclipse Resources Corp. drilled a record well at Purple Hayes. CEO Ben Hulbert says it was designed to completely change the cost structure and return profile of Ohio Utica Shale drilling.

“With a total measured depth of 27,048 feet, the Purple Hayes lateral spans 18,544 feet, yet was drilled in only 17.6 days in a single bottom-hole assembly run. Moreover, Eclipse Resources completed the well in 23.5 days, placing a plug-and-perf hydraulic fracturing stage every 150 feet along the 3.5 mile-long lateral, averaging 5.3 stages each day. When all the work was done, Hulburt says the total drilling and completion cost came in at $854 per foot of lateral, shattering any previous industry benchmark in the Utica Shale.

“From a cost perspective this translates into a step reduction in total costs per lateral foot, which is almost 30% better than our lowest cost well previously drilled and far below any other company drilling in the Utica Shale.

“Our concept in drilling as well was to enhance the return profile of the Utica play by determining the technical limit of lateral length in the liquid portion of our acreage to confirm our estimates of total well cost.”

Companies like superlaterals for one simple reason: it spreads drilling and completion costs over as many lateral feet of stimulated reservoir volume as possible. One well is cheaper than two or three or four.

Add superlaterals to monster fracs, and the Saudis now have a long-term problem. The Kingdom is already slashing government projects and military spending, reducing its welfare-like payouts to citizens, cashing out its foreign reserves, and selling government bonds. It is even on track to take Saudi Aramco, the world's largest oil company, public in 2018 with an estimated $2 trillion IPO.

Time will tell how that works out. I do know that U.S. companies that produce and deliver fracing sand are looking good right now. And that's what we are buying in Crisis and Opportunity.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.

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