There's a massive bottleneck in the Permian Basin right now due to a lack of pipeline capacity headed out of the region, but that hasn't stopped oil and gas producers from drilling new wells. Not by a long shot.
Energy companies are sweeping through their acreage and drilling wells at the fastest monthly pace since late 2014. In fact, three new wells are drilled for every two wells put into production. The result is a record number of drilled but uncompleted (DUC) wells in the Permian Basin, which reached 3,866 at the end of October. That's nearly as many as the entire country had at the end of 2013.
It's not the only region with pent-up production potential. According to the U.S. Energy Information Administration, the country's seven largest shale regions combined had 8,545 DUC wells at the end of October. That's easily the highest count since tracking began, which is hardly surprising considering the tally has risen in 21 of the last 23 months.
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That raises the question: Have oil and gas companies lost their minds?
Well, not really. The American shale industry is bullish on its near- and long-term prospects -- and for good reason. There's growing strength upstream (production) and downstream (refining, petrochemical manufacturing, and exports). Combine that with expectations for midstream (pipelines) to finally start catching up to the opportunity at hand in 2019, and oil and gas drillers are simply readying their acreage for an inevitable surge in pipeline takeaway capacity. By drilling wells now, companies can circle back around to complete the process and put those assets into production when the market is ready.
If infrastructure expansion takes place as planned, then investors might start to see the number of DUC wells fall in the second half of 2019. That would likely coincide with a healthy surge in oil and gas production and put the oil field services offered by Ecolab (ECL 0.16%) and Core Laboratories (CLB) in high demand.
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Ready to serve when energy bottlenecks are removed
Ecolab is a diversified industrial conglomerate operating in various water, hygiene, and energy industries. The business has prioritized investments in higher-margin and higher-growth opportunities in food and healthcare applications in recent years, but it's still a major player in oil and gas production around the world. In fact, the company's products and services aided 45% of global production of petroleum products in 2017.
That's rather impressive, but believe or not, the company's energy segment is still performing well below the high-water mark set in 2014. While total segment sales reached $3.2 billion in 2017 -- marking year-over-year growth of 4% -- that was 23% below revenue delivered in 2014. But if pipeline additions throughout 2019 trigger a surge in well completions in the back half of next year, then Ecolab would be one of the best-positioned companies to take advantage.
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The company's energy segment has already leaned on increased drilling activity to deliver year-over-year, acquisition-adjusted revenue growth of 8.5% through the first nine months of 2018. Considering Ecolab also offers a full suite of well-completion services and products (like corrosion prevention and cementing and casing services), the company is likely to play a crucial role in any reduction in the DUC well count. Investors watching the metric on a monthly basis might even get a head start on what's likely to be packed into the company's quarterly earnings reports next year.
Built on American shale
Energy analytics leader Core Laboratories is in a similarly advantageous position to capitalize on any surge in completion activity from American shale fields. The company delivered impressive year-over-year growth of 10% for revenue and nearly 30% for operating income in the first nine months of 2018.
That was entirely driven by compounding strength in the production enhancement segment, which grew revenue and operating income 32% and 93%, respectively, in that span. The segment is heavily focused on American shale customers. The company's reservoir description segment, which leans on non-U.S. customers for 80% of sales, saw year-over-year declines of 1.3% and 9.7%, respectively, in the comparison period.
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In other words, American shale is very important to the performance of Core Laboratories. So it's encouraging to see a soaring number of DUC wells, which is just the latest sign that the company's core customer base is planning for big production gains to continue for the foreseeable future. While the "drill now, complete later" strategy hasn't translated to share gains for investors in 2018, continuing to deliver double-digit earnings growth can only be ignored for so long.
Will the drilling boom convert to a completion boom?
It's not very often that a single metric can reveal so much to individual investors, but the number of DUC wells in American shale regions suggests oil and gas producers are very bullish on their near-term opportunities. While pipeline bottlenecks have kept companies from completing drilled wells in the last two years, the industry is confident that major pipeline expansions in 2019 will come on line as planned.
That said, it may be more likely for production gains to be made in piecemeal fashion in the next several years rather than in one giant step up.
It may not matter. The important thing to consider is the long-term trajectory of American oil and gas production, which is showing no signs of slowing. And the sustainability of the trend appears quite healthy thanks to downstream opportunities in exports, refining, and petrochemical manufacturing. That hints at significant long-term opportunities for both Ecolab and Core Laboratories to continue growing.
