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.
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.
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.
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.
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.