Cost Structure Analysis Provides More Certainty for Oil and Gas Company Valuations: Wall Street Transcript Interview with Philip Weiss, Senior Equity Research Analyst

Wall Street Transcript

67 WALL STREET, New York - January 16, 2013 - The Wall Street Transcript has just published its Oil & Gas: Refining, Independent and Major Integrated Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Capital Expenditures and Consolidation Activity - Refining Crude Price Differentials - Frontier Exploration and Development - Shale Drilling Capital Expenditures - Oil and Gas Price Divergence - Oil Price Expectations - LNG Global Pricing Differentials

Companies include: Anadarko Petroleum Corp. (APC), Chevron Corp. (CVX), Exxon Mobil Corp. (XOM), Chesapeake Energy Corporation (CHK), Atlas America Inc. (ATLS), Hess Corporation (HES), Transocean Ltd. (RIG), ConocoPhillips (COP), Schlumberger Limited (SLB) and many others.

In the following excerpt from the Oil & Gas: Refining, Independent and Major Integrated Report, an expert analyst discusses the outlook for the sector for investors:

TWST: What's going on from a technology perspective? Are there any exciting developments that you think might be particularly impactful in the coming years?

Mr. Weiss: Most companies, what they're really trying to do is try to get a better understanding of their plays, because in many cases we've had companies that have really done a lot of the drilling activity to hold acreage. As they move from that stage where they're drilling, to hold and protect their positions, to where they want to make them more productive, there are efficiency gains that can be realized. During its third quarter conference call, Hess' (HES) management was talking about how, I think, from the beginning of this year until the end of the third quarter, in the Bakken, that well cost went down by about 29%, and that's because by the end of the third quarter - I guess, during the fourth quarter; I'm sorry, they will have basically - all their acreage will be held by production, so that means that they can do more pad drilling, which is much more efficient. When you're just drilling to hold by production, you might drill just one well within a large area just to protect that acreage, and then you have to move to another location when you have your acreage held by production, you can do pad drilling, so that cuts down your drilling time and lowers your costs. And then you can also decide the optimal number of frack stages, the optimal length of the laterals and some of the other particulars that go with those wells. So I think that's really important, and that's where they can get a lot of efficiency gains, and we're seeing a lot of cycle times go down over time, and I expect that we should see that to continue.

And I think the other thing that a lot of the companies are looking at too, is using more environmentally friendly fracking fluids to help reduce some of the concerns around the fracking process. Another issue to keep in mind is that the fracking process requires a lot of water, so I think it will become increasingly important to recycle water and to reduce water use. Drilling these wells requires a lot of water, and water is also a finite resource. So we can't use too much of anything, but you can recondition that water and use it over again, which will also lower your cost. If you can come up with a way to more efficiently use water, you won't be bringing water to the well site as frequently. I think that would be a positive development. So I think those are areas where companies are looking to make further innovation.

And then just offshore, I mean, wells are getting deeper and deeper. We've had the first signs of activity in the Arctic up in Alaska, where Shell (RDS-A) did a little bit of preliminary work this year. But I think that's a new area that you're going to see more technological advancements over time. Arctic activity is also relatively new, and there are a lot of environmentalists concerned about the potential risks that come with drilling in such climes, so companies should take a lot of care taking just to make sure that nothing goes wrong, because if it does it could have a lot of negative implications for the industry.

TWST: What is your overall advice to oil and gas investors at the moment? What do you think is the best way to play this sector right now?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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