I'm sure you've heard it said that you have to spend money to make money. Several companies in the oil and gas industry have a different spin on that phrase, as these companies believe you need to spend money in order to save it. In each case the company is building out its own business unit to save the money it would have spent by contracting with a third party. In doing so, these companies are also building up a hidden asset that one day could be unlocked.
An Oasis of hidden value
The Bakken has created a lot of value for energy investors; however, that value doesn't come cheap. It's very expensive to drill in the Bakken, with costs upwards of $10 million per well. To get that cost down, exploration and production companies are exploring all options, including taking well services in-house.
That's exactly what Oasis Petroleum (NYSE:OAS) decided to do when it formed Oasis Well Services. The company made an initial investment of $24 million in equipment, which has been money well spent. The business is exceeding expectations both in terms of performance and savings since completing its first frac job last March. In the past year the business saved the company $17.5 million in capital, and it expects to save about $500,000 per gross well going forward. It also expects to generate about $200,000 per gross well of incremental cash flow from its non-operated partners going forward. This has enabled the company to already recoup its initial investment in the business.
One of the key environmental issues of fracking is disposing of the water after it's been used. However, because of the rapid production growth in many new plays, this disposal infrastructure simply doesn't exist. Instead of hiring a company like frack-water treatment specialist Heckmann (NASDAQOTH:NESC) to truck the produced water away, some companies are simply building their own disposal systems.
In the Mississippi Lime, top driller SandRidge Energy (UNKNOWN:SD.DL) has already invested half a billion dollars on its own saltwater disposal system. The company has 116 active disposal wells and has laid 700 miles of pipeline. This has cut the percentage of produced water trucked from 6% early last year to under 2% by the second half. Overall, the system is saving the company $2 per barrel of water when compared with trucking it. This savings is yielding a very quick payback for SandRidge.
Cutting out the middleman
One of the more common money-saving investments an oil and gas company will make is in building out a midstream system to enhance its operations and profits. Lately, though, that trend has been reversed, as we've seen a large exodus of these operations, with midstream MLP IPOs a hot commodity. One company that still does have its midstream operations is Devon Energy (NYSE:DVN).
With ownership of 16,000 miles of pipeline and 62 processing plants in both the U.S. and Canada, Devon's midstream operations are impressive. These operations kick off about $450 million in operating profit and enhance the company's margins by $2 per barrel of oil equivalent. Devon has plans to expand the business this year to the tune of a billion dollars because it sees several profitable growth opportunities.
Foolish bottom line
Right now these assets all represent hidden value that's only realized through current cost savings. However, over time you'll most likely see the value of these assets unlocked either through a sale or other strategic initiative. Devon has already announced that it's looking to turn its midstream operations into an MLP, while SandRidge has said it that it would like to monetize its saltwater disposal system. The bottom line, though, is that companies with these hidden assets have realized that you really can make, or "save," money by spending it.
Fool contributor Matt DiLallo owns shares of Heckmann and has short June 2013 $4 puts on Heckmann. The Motley Fool owns shares of Devon Energy and Heckmann and has options on Chesapeake Energy and Heckmann. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.