Saturday, October 23, 2010

Kent Moors: How to Play an Explosive Oil Field Services Sector

The rise in crude oil prices is already ushering in another round of increasing drilling. Before the revenues from the oil itself start to flow, however, matters are improving dramatically for the oil field services (OFS) sector. OFS includes all aspects of field preparation, drilling, and well completion leading up to the actual flow. And actually, this applies to drilling for both oil and natural gas. On the gas side, prices are languishing, now down to less than $3.40 per 1,000 cubic feet for a standard NYMEX contract. Yet the huge prospects for unconventional flows from shale gas, tight gas, and coal bed methane production, combined with a likely push for additional gas as fuel in the production of electricity, are pushing drilling higher. And you can be among the first to profit.

The Best OFS Indicator: The Number of Drilling Rigs in Use
During the depths of the financial crisis, drilling experienced a collapse in rig usage, with the decline in both demand and pricing. At its low point, we had barely one third of the rigs being used in any capacity, many of them in injection or workover usages, that is, not drilling new wells for new volume. That is now in full reversal. As of Monday (October 18th), the overall total of drilling rigs in use stands near five year highs.

Even more significant are the field units involved in horizontal drilling. These operations are essential to shale gas and oil development, as well as a range of applications where lateral, rather than vertical, drilling angles are warranted, either for enhanced production or environmental reasons. I’ll give you one of the main indicators I always apply in looking at the overall rig figures. Since November 2005 (when I first started calculating these figures, roughly with the beginning of major shale gas plays), having at least 500 rigs in North American field development applied only to horizontal drilling and hydrofracking operations is taken to mean a significant rise in the OFS market.

As that figure moves beyond 500, we tend to experience an OFS sector heating up, with expanding prices and equipment shortages. That puts OFS providers and their field availability at a premium, thereby increasing service charges… and profitability. A total above 600 indicates an accelerating inflationary pressure in those charges. And as of Monday, the horizontal rig usage stood at 641. What is occurring in rigs is also taking place up and down the OFS provision chain, from seismic and geological survey services to well completions and logging (the generation of readings to determine a range of wellhead and pipe casing conditions). And the results are intensifying.

Read the entire article to learn How to Profit on the Explosive Oil Field Services Sector


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