Colorado Floods Highlight Opportunity In Oil And Gas Services

Flash flooding in Colorado took a considerable toll, but there is always opportunity in crisis—this time, that opportunity lies in service companies. In this interview with The Energy Report, Jason Wangler, analyst with SunTrust Robinson Humphrey, recounts how emergency service, information technology and small infrastructure-building companies have found a profitable niche in making oil and gas operations safer and more responsive in the event of disaster. He also tips us on some international plays with hidden values and a few firms with great risk/reward profiles in the domestic shale fields.

The Energy Report: Jason, how did the recent flash flooding in Colorado impact the Wattenberg oil field?

Jason Wangler: It was a very nasty flood and all the companies on the ground are working hard to assess the damage. There have been reports of tank leakages and other problems. But the wells were turned off during the flood, so drilling operations were not affected much. The questions that remain are how much work is necessary to fix the roads? And when can the drillers safely turn the wells back on?

TER: Given the ever-present possibility of natural disaster, what type of emergency preparations do oil and gas drillers typically take?

JW: In the past, production companies could not do much to avoid the impacts of major earthquakes and floods. But now, our cellular and software technologies can turn off, edit or suspend wells from remote locations. Noble Energy Inc. (NBL:NYSE) is one of the largest players in Colorado. It can remotely turn off wells without having to put boots on the ground. The world needs safer oil and gas operations and there is a clear demand for improved information technology (IT) in that arena. In addition to advancing IT response capability, most companies have a select group of firms on-call to respond to rig fires and explosions, such as Wild Well Control Inc. (private) and Halliburton Co. (HAL:NYSE).

TER: What are the main operational constraints for companies looking to ramp up exploration in the ever-expanding shale oil fields?

JW: Improving infrastructure and training workers are vital to developing the fields in North Dakota, West Texas, South Texas and in the Ohio-Pennsylvania fields, where the majority of growth is occurring right now. Getting the oil to the surface is one thing, but then it has to be transported to markets in Oklahoma, the Gulf Coast, the West Coast and the East Coast. Sourcing fresh water and sand for drilling is also an issue. The most successful exploration and production companies (E&Ps) have ample capital and liquidity to support growth without constraining themselves too much in case of a downturn.

TER: Are lenders interested in solving these types of infrastructure and transportation problems by shaking loose some capital?

JW: Absolutely. In particular, the private equity markets are stepping up in a big way to fund infrastructure and transportation start-ups. There is a lot of private money out there looking to capitalize on aspects of the shale opportunities that the public markets sometimes do not bother to look at. The public market likes to step in when the infrastructure is already built and earning revenue, with solid earnings before interest, taxes, depreciation and amortization (EBITDA). Often, the privately financed facilities are sold to publicly traded master limited partnerships (MLPs). But you do not see public capital building much in the way of infrastructure from scratch. Public companies are more interested in acquiring already-producing fields linked to accessible markets. After they see cash value pumping at the wellhead, they will jump in to capture returns from producing facilities and pipelines. That is why private equity is increasingly fundamental to early-stage development and where it goes, investors can follow.

TER: How does oil field infrastructure in the U.S. compare to the international E&P space?

JW: Stateside, we are still looking for oil and gas, even though prices are depressed. There is no telling exactly when that will turn positive. And although the infrastructure in the States is not perfect, it is ample and largely available. Internationally, the explorers are hunting for elephants. Again, one of the biggest constraints is understanding how much a company will have to spend to build out enough infrastructure to bring new energy to the market. Internationally, gas prices are much more robust, so finding gas in underdeveloped areas is not a bad thing, because there is such an upside to developing new sources. Companies are focused upon finding large, economic plays for oil, gas or even natural gas liquids (NGLs). There is risk in exploring and developing a region so that the cash can flow. But the rates of return can be phenomenal.

TER: What companies are you following internationally?

JW: One small firm that we like is called Harvest Natural Resources (HNR:NYSE). It has assets throughout the international space. In Venezuela, Harvest is attempting to monetize a major asset. It has a handshake agreement to that effect with a company called Pluspetrol in Argentina. It also has some assets in offshore Gabon, West Africa, and a shale play in Colombia, and several promising assets in Indonesia and China. If it sells the Venezuelan assets, it will be able to focus more on its Gabon wells, which have a lot of prospectivity. For instance, there was recently a Total S.A. (TOT:NYSE) well in the same area that had a very nice result. Harvest is looking to have the Gabon production online in the next 18-24 months, which would be a quick turnaround with potentially significant gains, and Harvest is looking for help to finance its Gabon growth.

International assets are generally a tough sell to investors because investors have a hard time valuing foreign assets. In the States, an investor can look at what firms are producing next door to a certain well, and have a degree of confidence, but it is more difficult to make that kind of assessment internationally. Of course, the international space has many great assets, and Harvest has the expertise to find and develop profitable wells.