National Oilwell Varco: Opportunities With Cleaner Fracking And FPSO

| About: National Oilwell (NOV)

National Oilwell Varco (NOV) signed a two-year licensing agreement with Oasys Water regarding its Membrane Brine Concentrator (MBC) 4000 system in December 2013. This system is a membrane based technology used to desalinate frac water from exploration and production into potable quality water. Potable quality water could be used for drinking purposes. The MBC4000 system employs forward osmosis, or FO, technology to purify water used in drilling purposes. This system will recycle and allow reuse of frac water for drilling purposes. FO technology is effective at removing organic and inorganic contaminants and could effectively recover more than 80% of the water from drilling waste. The MBC4000 system could achieve a high recovery rate of around 85%. The partnership with Oasys will give National Oilwell Varco an advantage by enhancing its water treatment portfolio in the "produces water" segment because Oasys Water is a specialist in FO technology.

Recycling and reusing water results in significant cost savings for the oil and natural gas drilling companies. Some basic calculations can shed light on the potential savings from using water recycling technologies. An average multi-stage frac job could use water ranging between 2 million gallons and 5 million gallons. Transportation cost of fresh water constitutes a substantial cost for a company engaged in drilling. The cost to transport 100,000 barrels of water to a well is around $487,000. Cost per well to treat and recycle 100,000 barrels of water could be around $324,000. This results in a cost saving of $163,000 for 100,000 barrels of water usage. In addition, water treatment could result in a reduction of truckloads, which is one of the costliest methods of water transportation. Movement of trucks could be reduced by around 295 truckloads per well, a 36% reduction.

In fracking, around 10% to 30% of the water flows back to the surface, and the rest of the water pumped in remains trapped in the shale formation. So the amount of flow back water from each well could range between 200,000 gallons to 1,500,000 gallons for an average multi-stage frac job. This requires a desalination system with large capacities to treat such volumes of water. The MBC4000 system could treat up to 4000 barrels of water per day with a high recovery rate. The adoption of recycling systems is gaining momentum in different shale plays in the U.S. because of pressure on available freshwater resources and reducing competition over the water resources.

The Railroad Commission of Texas, which regulates oil and natural gas drilling in Texas, has enacted a law to encourage water recycling practices. In the Marcellus shale, around 90% of the flow back water is recycled because the region is geologically less suitable for deep injection wells. Texas and the Marcellus region constitute key fields and produce a major portion of the oil and natural gas in the U.S. In U.S. alone, oil and natural gas companies' costs for treating produced water is around $18 billion. In 2012, Oasys tested its MBC system with 1,430 barrels, or 60,000 gallons, of produced water in the Marcellus shale. The partnership with National Oilwell Varco will initially focus on developing markets for the MBC system in the Permian Basin in Texas and the Marcellus shale formation. The efficacy of the MBC system is expected to drive the demand for the system in the two regions.

Can FPSO be a revenue driver?

National Oilwell Varco could see a rise in demand for its floating production storage and offloading, or FPSO, offshore well drilling systems. FPSOs are a kind of floaters used for production and storing of oil and natural gas. The company has an estimated 80% of the "floater package" market. The floater package consists of the system required for deep-sea well drilling. Around one third of the world's oil production is done by FPSO and its usage is increasing. There are factors that are driving the demand for FPSO. This system doesn't require deep subsea pipelines and can be moved from its position in case of bad weather. National Oilwell Varco is expected to have a total order backlog on FPSO of around $1 billion in 2013. The demand for FPSO is driven by the oil and gas exploration in the Golden Triangle, (consisting of the Gulf of Mexico, West Africa and Brazil) with Brazil taking a lead role. Through 2012 and 2013, Petrobras (PBR) made a significant number of offshore oil field discoveries in Brazil. The number of discoveries was around 25 with a proven reserve of around 16.4 billion barrels of oil equivalent, or bboe. Petrobras plans to produce around 5.7 million barrels of oil equivalent per day, or mboepd, by 2020. To achieve such an enormous production between 2013 and 2020 the company plans to spend around $130 billion for production and exploration within the same period. It is expected that around 38 FPSO units will become operational within this time frame.

The market for FPSO has increased significantly from 2003 through 2013. Out of 269 total floaters in 2013, around 61% consist of FPSO. Further, the construction market for FPSO is looking strong. Among the 70 floating units under construction, around 40 are FPSOs. The FPSO market is generally classified into less than $500 million and above $500 million. After March 2013 the number of FPSO units ordered were around 11 with a total value of around $10 billion with an average value of around $1 billion. The large orders indicate strengthening market demands for FPSO, which could help National Oilwell Varco generate revenue from this segment.

Shifting drilling markets

National Oilwell Varco continues to invest in technologies that provide solutions to current fracking problems. The MBC4000 systems, by employing FO technology, provide efficient recycling that will help companies reduce reliance on freshwater resources and provide economic benefits. This system is likely to gain acceptance in the fracking operations and it will help generate revenue for the company in the coming quarters.

With the FPSO market showing signs of strengthening, the company could face a demand for its drilling systems. Since the company enjoys a significant portion of the offshore drilling systems market, the demand for FPSOs could add revenue in the coming quarters.

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Business relationship disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article