Advanced Technologies Keep Wildcatters Busy
A Stock Driven by a Simple--and Profitable--Innovation
One of the aspects of following the energy industry I enjoy the most is learning the ingenious ways of harnessing the energy resources we need.
One fantastical option in particular has caught my eye--ice islands. As the arctic becomes a more viable prospect for prospecting for oil, the Alaskan government will be auctioning leases for exploration blocks off its arctic north shore later this year. The total area to be auctioned is the equivalent of Massachusetts, Connecticut and Vermont combined, and is believed to hold as much as 25 billion barrels of oil. A significant problem is that even as the arctic ice is thinning because of global warming, there is still plenty of sea ice during arctic winters. And unlike ice in a pond or lake, the sea ice moves, driven by currents underneath that can cause ice to pile up and crush everything in its path--a tragic problem many ships hunting for the Northwest Passage experienced.
So even as oil companies plan to take on the not-insignificant task of drilling beneath the ocean surface to the pool of oil below, they have to figure out how to manage winter ice. The solution: ice islands.
Ice has been used as a construction material for decades in Alaska: for roads, airstrips and, in the 1980s, ice islands. Basically, ice islands are just that--masses of man-made ice big enough to hold an oil well and its equipment and to withstand winter ice drift. Originally, ice islands were made by flooding existing ice structures with seawater until they were deemed strong enough (in some cases, wells are on dry land in summertime, and then surrounded by ice and water in the winter).
In 1986, one of the first islands was made using spray ice--think along the lines of how a ski resort makes snow. The island, with the seemingly appropriate name of Mars, took 898 hours to construct over 46 days and used a million cubic meters of water to create an island 700 feet in diameter and 26 feet thick at its walls with the well in the center, according to the Oil Drum energy blog and a federal government report. Because they are made of seawater, ice islands are far cheaper than islands built of gravel, which would require trucking materials in from hundreds of miles away.
Theoretically, farther off land, where the ice can't be piled on top of seabed, ice islands can be constructed to be free-floating, fastened to the seabed by ropes, which, theoretically, could allow the islands to be towed away if exceptionally strong sea ice forces were imminent. This isn't quite as silly it as it sounds.
The Hibernia Management and Development Company, a Canadian firm formed by a joint venture of six oil majors, runs the Hibernia oil platform off Nova Scotia. The rig is designed to withstand a 10,000-year iceberg collision. But to be safe, the company uses so-called "Arctic Cowboys" to tow icebergs away. According to Hibernia, "The platform support vessels encircle the iceberg with a long cable or rope--much like a giant lasso--and tow the iceberg into a different trajectory. It is not necessary to tow the iceberg very far, as even a slight nudge to an iceberg at that distance will change its course considerably over a 20 km drift." Yee-haw!
Make no mistake, becoming more ingenious is necessary to keep up with the world's increasing energy consumption. Even in this difficult economic time, world energy usage is growing--the Energy Information Agency said in its September briefing that the slower than-expected energy growth will still require a drawdown of reserves to meet demand by year's end. And a drawdown of reserves means more oil needs to be drilled to replace it.
In the 1940s and 1950s, when the giant oil fields of the Middle East were being discovered, getting oil out of the ground was akin to making a hole in a coconut and sticking in a straw. That's one of the reasons the local governments there found it very easy to kick out the Western oil companies that started the fields--it didn't take much expertise to tap all of that oil.
Today, however, finding so-called "giant" oil fields (generally meaning fields believed to have one billion or more recoverable barrels of oil) has become far more difficult. That has created the need for techniques like horizontal drilling, which requires the remarkable tech savvy to turn a drill 90 degrees deep underground in solid rock to reach what are called unconventional deposits.
In the past decade, four innovative technologies have evolved to help make such drilling more accurate--and profitable. One is 3D imaging for locating deposits and directing drills. Another is swell packers, simple packets first used in 2001 in Norway that swell when they meet hydrocarbon molecules, which helps isolate oil deposits deep underground, replacing the costly and often ineffective use of cement. The third is "perf and plug," which controls how a company fractures rock by pre-fracturing between swell packets, which can better direct subsequent fracturing.
The fourth technology is the basis for my stock recommendation this issue. It's ceramic proppant. Proppant does just what it sounds like it does--it props open rock. Once rock is fractured, usually by a controlled explosive device, the rock literally needs to be propped open to allow the flow and pooling of the target liquid to occur.
Proppant has historically been sand, generally easily available and cheap. However, industry studies have found that sand, being of irregularly sized granules, packs in tightly and therefore isn't an ideal for maximizing flow. Sand is improved by coating it with resin, making for a slightly better and slightly pricier proppant, but it is still not ideal.
The best proppant is made of uniformly sized ceramic, which allows more space between each ball of proppant, resulting in improved flow of oil and gas through the rock.
CARBO Ceramics (CRR) is the world's largest producer of ceramic proppant, supplying leading oil services companies including Schlumberger, Hughes Oil and Gas and many other independent oil and gas exploration firms. The Houston-based company makes a series of eight different types of proppants, some covered with resins for wells that need a slicker proppant, others made of bauxite for higher pressure environments, others of smaller size for various depths and densities of rock.
CARBO's great advantage: data shows that wells that use its ceramic proppant produce twice as much oil and gas as similar wells using basic sand proppants. This is especially important in unconventional fields such as the Bakken in the Dakotas, where that production data was collected.
CARBO also sells software for modeling how to fracture rock, and recently added a business that provides quick-curing polymer linings used in oil and gas storage tanks and on the low walls that surround tanks and wells to prevent catastrophic spills from spreading.
CARBO is also expanding its resin-coated business, betting that it can convince users of sand to pay a little more for resin, and then eventually convert many of them into buying the costlier ceramic proppant. Right now, it's believed that ceramic proppant is used by 25% of the world's proppant market, with resin used by 15% and plain old sand by 60%.
CARBO generated $473 million in revenues in 2010, and has beaten expectations with over $300 million sales the first half of 2011. I expect the company to generate $5.51 in earnings per share for 2011, well over 2010's $3.42 net income.
CARBO has held up well in the recent market turmoil, slipping from a high of 180 to find strong support around 150. Today around 154, it's near where Cabot Global Energy Investor bought shares when we featured CARBO in June. Subscribers collected a 20-cents per share dividend along the way, but the real profits are to be made in the price growth of CARBO, which could be challenging 200 by year's end.
All the best,Brendan Coffey
Editor of Cabot Global Energy Investor
Editor's Note: Brendan Coffey is the editor behind Cabot Global Energy Investor, which selects the top energy stocks each month and combines them with Cabot's proprietary market timing indicators to score winning results for subscribers. With new energy technologies coming to the forefront, now is THE time to profit from the top stocks in this sector. Learn how you can be an early investor in this high-potential area today.