Is Jim Cramer Making Sense Right Now?

Ensco 99 drilling rig. Source: Ensco website 

While I'm not one of his biggest fans, I do think that Jim Cramer does have some solid advice from time to time. Monday night was one of those times as Cramer shot his Mad Money show from the Ensco (NYSE: ESV  ) 99 jackup in the Gulf, which it is operating for Energy XXI (NASDAQ: EXXI  ) . On the show he detailed how Energy XXI was using horizontal drilling technology to breathe new life into an old oil field that the company bought from ExxonMobil (NYSE: XOM  ) . It's a technology that Cramer believes will prove to be very valuable in making mature energy fields viable again. This insight makes a lot of sense and could make investors a lot of money in the future.

Drilling down into Energy XXI
Energy XXI has quietly been buying up mature oil fields in the shallow waters of the Gulf of Mexico that bigger oil companies didn't want. It actually made some big news on that front after Cramer's show aired as it announced it was buying EPL Oil & Gas (NYSE: EPL  ) . That deal, when combined with its already large asset base, positions the company well for the future. 

One of the reasons its future is so compelling was profiled on Mad Money. The field on the show was purchased by Energy XXI in 2010 as part of its purchase of ExxonMobil's Gulf of Mexico shelf properties for just over a billion dollars. Those properties weren't big enough to move the needle for ExxonMobil and, as Cramer put it, this field was "left for dead by Exxon." But thanks to horizontal drilling, these fields are moving the needle for Energy XXI.

As the following slide details, Energy XXI can drill substantially more productive horizontal wells in the shallow waters of the Gulf of Mexico than the average horizontal shale well that's drilled onshore.

Source: Energy XXI investor presentation (link opens a PDF)

Note that the average initial production rate is about three times higher, while the estimated ultimate recovery of oil and gas is more than double a shale well. This production increase doesn't cost all that much extra as the drilling and completion cost is just slightly higher than an average shale well. That combination leads to pretty compelling rates of return for Energy XXI.

"Just scratching the surface"
In Cramer's interview with Energy XXI CEO John Schiller he noted that Schiller repeatedly said that his company was "just scratching the surface" when it comes to redeveloping the field it purchased from ExxonMobil. Drilling in the West Delta 30 field had been dormant since 2005, but the company just finished a new development well at the field and is planning more wells like it elsewhere throughout its portfolio. This suggests there is ample upside from drilling these developmental wells.

Photo credit: Flickr/Tulane Public Relations

So far, the company has been very successful in drilling its development wells as its success rate is running at 95% according to Schilling. Because of that it sees a lot of running room as it redevelops these mature fields. In addition that that the company has substantial exploration opportunities including deeper salt dome plays as well as ultradeep plays both onshore and in shallower waters.

Investor takeaway
Horizontal drilling of mature oil fields is breathing new life into once forgotten oil fields. That new life could make investors in a company like Energy XXI a lot of money in the future. But while I think Cramer is making a lot of sense suggesting Energy XXI is a great stock, I'm not yet convinced it's the best way to play offshore drilling just yet.

This is the technology that has OPEC running scared

While horizontal drilling is a game changer, it might not make you rich. Instead, imagine a company that rents a very specific and valuable piece of machinery for $41,000 ... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2876149, ~/Articles/ArticleHandler.aspx, 8/28/2015 9:24:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 12 hours ago Sponsored by:
DOW 16,654.77 369.26 0.00%
S&P 500 1,987.66 47.15 0.00%
NASD 4,812.71 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 3:59 PM
EXXI $1.71 Down +0.00 +0.00%
Energy XXI Ltd. CAPS Rating: **
EPL $0.00 Down +0.00 +0.00%
Energy Partners, L… CAPS Rating: ****
ESV $17.03 Up +1.58 +0.00%
Ensco CAPS Rating: ****
XOM $74.85 Up +2.35 +0.00%
ExxonMobil Corp CAPS Rating: ****