The most common adage heard among the investment community is “buy low, sell high.”
But depressed oil prices combined with the rise in bankruptcies led many industry insiders to wait for increased M&A activity. But the onslaught of fire sales and corporate mergers has yet to earnestly materialize.
This week, industry bellwether Schlumberger (ticker: SLB) announced its second 2016 acquisition: it snapped up the coil tubing segment of Xtreme Drilling and Coil Services Corp (ticker: XDC.TO).
Xtreme Drilling announced on April 27, 2016, that it had entered an agreement to sell eleven coil tubing units and associated intellectual property to Schlumberger for C$205 million.
“They’ve been dead right the whole time about where oil is going” – Cramer
Jim Cramer, along with many others, have viewed Schlumberger as a bellwether in the oil services industry. With oil hovering just above $40 per barrel, Cramer suggested that investors pay attention to SLB Q1 earnings to see if they will begin to act more bullish. “We need to hear Schlumberger’s view of the world,” says Cramer. “They’ve been dead right the whole time about where oil is going.”
With a major merger agreement with Cameron International in the books, Schlumberger is still on a buying streak. This would indicate the company has a bullish long term perspective. The Xtreme Drilling deal is by no means as substantial as the Cameron deal, but stocking up on key assets could be viewed as a bullish move.
“We continue our pursuit of advancing overall drilling and well intervention efficiency through technology integration to help our customers improve production at a lower cost per barrel,” Sherif Foda, president of the production group within Schlumberger, said in a statement.
Getting its DUCs in a Row before a Return to Drilling?
A major effect of the downturn in commodity prices has been companies laying down rigs and rig count falling dramatically, falling roughly 75% from a recent quarterly high of 2,094 in Q3 2014.
The logical reversal in this trend would be to increase the rig count to bring production back online. However, there are several issues that could bottleneck the process of raising the rig count. There are two major phases to getting a well online, drilling and completion. In many circumstances these two aspects are done by different crews and function off of two separate timeframes.
DUCs
However, a multitude of operators have been drilling wells while rig costs are low, but not completing them due to the current commodity environment. According to the North Dakota Department of Mineral Resources, there are an estimated 945 wells awaiting completion as of the end of January 2016. The first move toward increasing the rig count is to complete wells that have already been drilled—the so called DUCs (drilled uncompleted).
Using Oasis Petroleum’s core Bakken decline curve, an average well produces 206 MBOE in its first 365 days online. If we turned all 945 wells waiting completion online, this alone could add 533 MBOEPD to production increasing Q1’16 Bakken production of approximately 1,064 MBOEPD by 50%.
Coil tubing can be used to pull frac plugs to get a well online and producing faster than some other methods as part of the completion process. This acquisition could be a sign that Schlumberger has increased their completion capabilities with the intent of being ready to complete more wells and get production back online more efficiently when activity in the oilfield picks up.
