Xtreme: Building a Better Driller

Includes: WFT, XTMCF
by: Carol Flake Chapman

Howard Hughes Sr. started his fortune by patenting a two-cone rotary drill bit that penetrated medium and hard rock with ten times the speed of any former bit, and its discovery revolutionized oil well drilling. So when I’m looking for energy stocks, I’m always on the lookout for the equivalent of that modified rotary drill.

I was intrigued first by the name and then by the technology of a Canadian company called Xtreme Coil Drilling (OTC:XTMCF), with offices and operations in the U.S. and Mexico. Xtreme Coil is a drilling contractor that designs, builds and operates its proprietary Coil Over Top Drive® (COTD) drilling rigs that use new patented and patent-related coil designs and technologies. Coil drilling, the company claims, is “next-generation” drilling. In addition to their coil drilling capabilities, these drilling rigs retain the ability to drill with conventional jointed drill pipe. Upon completion of the COTD drilling rigs, Xtreme Coil markets or operates the rigs under contract to oil and natural gas exploration and production companies, to international integrated drilling services providers and to national oil companies.

The company just announced that a major oil services company has signed agreements for Xtreme to customize two rigs for them for use in the Middle East, which marks a major expansion for the company. I did a little gumshoe work and figured out that this company must be Weatherford International (NASDAQ:WFD), with which Xtreme has done business before and which has just expanded into the Middle East. I also found that Xtreme was doing some heavy hiring for all kinds of positions, with the location said to be the Middle East.

Xtreme appears to have built a better mousetrap—that is, a drilling system that can drill faster, deeper and with less spillage than other similar systems. According to their Web site, the company’s coiled tubing drilling systems, top drive, injector assembly, rig and coil transportation, and processes related to coil drilling have received nine patents; six from the United States Patent and Trademark office; two from the Canadian Intellectual Property Office and one from the Eurasian patent authority for regions under its jurisdiction throughout Europe and Asia. Xtreme Coil has more than 60 further patent-related applications pending in the United States, Canada and other jurisdictions.

Coiled drilling apparently has a speed advantage in many situations. In shallower, unconsolidated formations, penetration rates of 1,300 ft/hr (396 m) can be achieved compared to 300 to 400 ft/hr (91 to 121 m) using a conventional rig drilling to the same depths. New generation coil drilling rigs are capable of drilling two 2,000 ft (609 m) wells in one day using preset casing. Other advantages cited by those in the industry: rig-up and rig-out is faster and often completed within an hour;
 continuous circulation provides better overall well control; 
less pipe handling can improve rig safety and requires a smaller crew;
 crews work in a comfortable, climate-controlled cab; and
 costs are lower. The drilling component can be reduced 15 to 50%.

Rapid technological improvements and the combination of coil technology with top drive technology is leading to further improvement in depth capability. New wells drilled achieve up to 7,000 ft (2,134 m) total depth. Exploration and production companies have begun to accept the technology, creating demand for even deeper drilling capability with coil rigs.

Xtreme Coil Drilling Corp. last reported un-audited consolidated earnings results for the third quarter and nine months ended September 30, 2009. For the quarter, net income was $2,734,000 or $0.05 basic and diluted income per share on revenue of $26,153,000 compared to net income of $1,278 or $0.03 basic and diluted income per share on revenue of $26,328,000 for the same period last year. EBITDA was $7,569,000 or $0.14 EBITDA per share compared to EBITDA of $5,899,000 or $0.15 EBITDA per share for the same period a year ago. Income before tax was $5,463,000 against $1,873,000 for the comparable period last year.

The company trades on the Toronto Stock Exchange as XDC, and you can purchase shares on the pink sheets with the stock ticker (OTC:XTMCF), usually without an extra commission, depending on your brokerage. The volume is still low, so the price jumps a bit. It has just jumped from $5 to $5.60. This is a small company whose growth depends on the acceptance of a new technology, so it remains a volatile and speculative stock. But as one industry veteran told me, if the technology catches on, the sky’s the limit.

Disclosure: Long XTMCF