I have had an even more sceptical response to my trip to New York, Chicago and Houston.
What possible value could a UK investor garner from meeting with businesses in America?
In fact, the benefits are substantial and derived from two areas. First, meeting with the heads of US subsidiaries of UK companies (as I did with BHP Billiton, Pearson, Centrica and Michael Page) can shed a great deal of light on what makes companies tick on an operational level, below the CEO/ Investor Relations level.
However, perhaps more important is the picture than can be constructed from speaking to US competitors, suppliers and customers of UK businesses which we already know or hold shares in. This information gathering is akin to what the great investor Philip Fisher called “scuttlebutt” and can be very educational. On this front, it was meetings with energy companies in Houston which proved most fascinating.
Like many investors, we have had a quite basic (even simplistic) understanding of how shale oil and gas fit into the global energy picture. We knew that shale oil production sat near the margin of the cost curve and, as a result, has been in the cross-hairs of OPEC and Saudi Arabia in choosing to prioritise their market share and production at the cost of a lower oil price.
This basic narrative has had pretty negative implications for companies such as the UK’s Weir Group, which has a strong position in the market for pressure-pumping equipment (kit used in the hydraulic fracturing process necessary to unlock shale oil and gas). Weir has seen a collapse in orders as shale activity has slowed. If Saudi Arabia is prepared to “price shale out of the market” then surely a business like Weir’s is structurally challenged?
In fact, a number of things we learned in the US lead us to believe this is far from the case.
First, shale oil producers are achieving quite staggering increases in productivity and efficiency – both in terms of cost and process. For instance, one leading shale player told us that the time it takes to drill a well has fallen from 45 days to 8 days in a matter of a few years. Another cited a record drill time of just over four days.
Yet another pointed to cost per well falling from $5-6 million to an average of $3 million. These are huge improvements and represent a phenomenon that pre-dated the fall in oil prices. In effect, shale oil/gas production has been becoming a high volume manufacturing process, and these businesses have been implementing manufacturing best practice. As one player put it to us, “when you do something [drill a shale well] over a thousand times you get pretty good at it”.
These wells are not only faster and cheaper to drill, but also are producing more oil – recovery rates have improved steadily in recent years and are expected by most producers to continue to do so.