When the Permian Basin of West Texas, one of America's historic oil fields, first opened to production in 1933, most experts initially estimated it would only be producing until the 70s. While the basin was certainly in decline by the 80s, new recovery methods kept it producing throughout the 90s and into the last decade -- much longer than anyone in the 30s would have dreamed. And in 2009 the trend reversed and Permian production began growing on another wave of new recovery techniques and shale drilling.
West Texas is analogous to the rest of the nation's historical oil production territories. When traditional oil pumping techniques remove all the oil they can, there are now two more sets of alternative recovery methods that can each recover just as much.
The chart above from Denbury Resources (NYSE: DNR ) shows us the example of Little Creek Field. Primary oil pumping, similar to what was originally used in the world's biggest basins, it has recovered only 20% of all oil. Secondary recovery methods, known as water flooding, should get an additional 18%. More recently developed CO2 flooding, where CO2 is piped in and injected into a reservoir, forces yet more oil out of the rock.
Secondary and tertiary recovery is appealing because of the economics. While shale and deepwater drilling are hot topics right now, it's much cheaper to get additional oil out of an old, conventional reservoir. This article will highlight three companies that are using secondary and tertiary recovery methods to get superior profitability.
The Permian kingpin
Occidental Petroleum (NYSE: OXY ) is one of the biggest independent oil companies out there, with a market cap of over $78 billion. The company is focused on three things: oil in California, oil in the Permian, and gas plants in the UAE and Qatar. In the Permian Basin, Occidental is the largest operator, producing a 16% share of all barrels of oil equivalent. And of Occidental's Permian production, 60% of it comes comes from CO2 recovery projects. Occidental delineates CO2 production in the Permian from non-CO2 based production. Why? Because its CO2-related projects are the most profitable business this company has.
CO2 flooding provides the "bedrock" for the company's cash flow from operations, and there's a lot to like about Occidental overall, too. Its CO2 production in the Permian is steady and growing, but the non-CO2 component is growing even faster. When we consider its oil production growth in California, we get a long-term growth rate of between 5-8%, nearly all of that growth in oil. This is a solid, growing producer trading at 1.87 times book with a tidy dividend of 2.67%.
A water flood MLP
Mid-Con Energy Partners (NASDAQ: MCEP ) is a master limited partnership engaged in water flooding in the heart of the American oil industry, Oklahoma. In fact, 99% of the partnership's reserves and production are oil. Mid-Con acquires properties just as primary production is finishing, employs water flooding techniques in the field, hedges much of its production, and distributes the guaranteed cash flow to unitholders.
As a partnership, Mid-Con pays no corporate tax and is able to distribute lots of cash, leading to a high distribution yield. Mid-Con yields a generous 7.86%. This is a rather young partnership, formed to receive dropdown acquisitions of mature fields from its parent company. As such, many of Mid-Con's fields are quite early in the water flood cycle and have not reached peak production. So production should continue to grow for the next three years assuming no further acquisitions. Mid-Con is able to cover its distribution by 1.26 times distributable cash flow, so it's safe even with lower oil prices.
The masters of CO2 flooding
No conversation of enhanced oil recovery is complete without Denbury Resources (NYSE: DNR ) . Denbury specializes in CO2 recovery, and operates in two regions: the Gulf Coast and the Rockies. The company produces 74,000 barrels per day, 94% of which is oil.
A few things stand out about Denbury. First, it has the highest margins in the industry and is the most capital-efficient, with close to the lowest finding and development costs. Concentrating only on tertiary recovery in mature fields means much less capital need be spent on getting to the oil. Second is an amazing growth plan. Management is confident it can grow production clear though to 2022 with no further acquisitions (Given the amount of mature acreage up for sale, it's likely there will be more acquisitions). Capital expenditure will begin dropping in 2017, whereby management foresees a dividend in the cards.
Oil prices are coming down these days. If this is going to continue, consider producers weighted to CO2 flooding. They tend to have margins superior to shale and deepwater drillers and can operate profitably at the lowest of oil prices. These three names are a good place to start.
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