Until a few years ago, few oil companies bothered to extract every last drop from their fields. That might seem surprising, given the ever-rising price of what the theme song from TV's Beverly Hillbillies so eloquently described as "Texas tea."
Yet most oil wells still have a fair amount of life in them. That's because it's relatively easy to extract the first 20% or 30% of a field's capacity. After that it becomes progressively more difficult and expensive to tap the remaining reserves. "That's why for every barrel we produce, there are two more in the ground," says Jeff Johnson, founder and CEO of Fort Worth (Tex.)-based Cano Petroleum (CFW).
Johnson, 41, a former finance executive, is betting that he can make a fortune extracting those stubborn reserves buried beneath the plains of Texas and Oklahoma. Oil is traditionally pumped by flooding wells with water. When the pressure reaches a certain point, the oil comes rushing to the surface and pours out of the well. As the field becomes depleted, the pressure created isn't sufficient to force the oil from the ground. So Johnson is using a form of high-tech detergent that loosens the oil, much as soap loosens oil from a cooking pan.
Johnson is one of many entrepreneurs who have started small businesses in the oil industry, which is dominated by giants such as Chevron (CVX), ExxonMobil (XOM), and BP (BP). Another, John Fitzgibbons, went to Russia after studying international relations at Harvard and then started Integra Group. This $200 million-a-year company is focused on the oil field-services market in Russia. Fitzgibbons says that "better technology and services can help extract oil that was inaccessible just a few years ago."
Cano Petroleum, a young company, has acquired about a half-dozen wells with a total of 40 million barrels of oil in Texas and Oklahoma. It has reaped just $7 million in revenue over the past 12 months, although sales are growing at a rate of 130% a quarter.
The company has yet to turn a profit, yet investors have more than doubled Cano's stock price over the past year, from $4.50 to $9.45. Institutional investors are starting to notice, among them Barclays (BCS), which owns more than 300,000 shares, or 1.2% of the 25 million issued.
Cano's motto is "producing oil and gas in the U.S.A. for the U.S.A." Johnson says every dollar's worth of oil that can be produced domestically is a dollar that doesn't have to come from suppliers overseas like Saudi Arabia. And because it has been decades since a major field was discovered in the U.S., it's vital to recover the difficult-to-drain reserves. "This is the future of the oil industry in the U.S.," Johnson says.
At the moment, Cano is supplying barely a drop to sate the seemingly insatiable U.S. thirst for oil. Its total reserves equate to about a half-day's global production. But Johnson plans to raise more money and acquire more wells. And the thought of competition doesn't bother him, either -- from his perspective, "there's plenty to go around."
Advances in technology are improving access to oil in all sorts of ways, says Donald Paul, chief technology officer at Chevron. He explains that the concept of deep offshore drilling has changed dramatically since he began his career 25 years ago in the Gulf of Mexico. Back then it was difficult to drill more than 500 feet below sea level. Now it's possible to drill 10,000 feet down, and engineers are working on robotic techniques that will make it possible to drill 15,000 feet below the surface.
No one really knows just how much oil is left in the ground. Oil companies don't worry about creating enough reserves to last more than a few decades, because they can't plan their businesses that far in advance. "Oil companies are in the business of selling oil, not in the business of opening up reserves," says Klaus Lackner, a professor at Columbia University's Earth Institute.
But many people, Johnson included, believe that humanity has burned through roughly half of its oil reserves. This theory of "peak oil" suggests that a 200-year oil epoch is about half over, and that prices of oil will only rise from now on. Rising demand and dwindling reserves will keep prices well above the level that makes advanced drilling techniques worthwhile, Johnson says.
No one really knows just what will happen to the price of oil, any more than one can predict how long the supply will last. "But I'm betting that 18 to 24 months from now, the price will be a lot closer to $100 a barrel than it is to $25," Johnson says. "I don't think there's a better place to invest your money than in a barrel of oil."
GUSHER OF OPPORTUNITIES?
Johnson is hardly the only bull. The trends in futures markets are starting to suggest that prices will remain high for a long time (see BW, 2/06/06, "Oil Prices: The New Reality").
Economist Ed Yardeni, chief investment strategiest at Oak Associates, thinks that a barrel of oil will cost between $55 and $65 for the rest of the year. That's more than enough to make it worthwhile to invest in advanced drilling. "I am recommending that you overweight energy for the third year in a row," Yardeni said in a report on Jan. 26. He has an "O" rating (for overweight) on oil-drilling stocks. With a low price-to-earnings ratio of 14.3, such stocks will be a good investment for at least the next year, he believes.
S&P said earlier this month that four out of seven industries that outperformed the market came from the energy sector (see BW Online, 1/25/06, "In Search of the Unsinkable Sector"). Other energy-exploring companies include Cimarex (XEC), which S&P recently placed in its Top Ten portfolio (see BW Online, 1/23/06, "Cimarex Gushes Into the S&P Top 10").
And that's why, as the Beverly Hillbillies sang so memorably, "the first thing you know, old Jed's a millionaire."