By Stephen Ellis
Weatherford (WFT) has disappointed us with its performance during the last few years, yet we believe it has managed to differentiate itself when it comes to artificial lift. Artificial lift products are used to provide another way to increase the flow of oil from a well when there is insufficient pressure to lift the oil to the surface. In fact, we believe this franchise is one of the company's crown jewels and potentially one of the biggest attractions for an acquirer. The firm is the only major provider of all six types of lift technologies--rod lift, progressing cavity pumping, gas lift, electronic submersible pumps (ESPs), plunger, and hydraulic.
Baker Hughes (BHI) and Schlumberger (SLB) only provide products in two or three of the lift categories. Wells require different types of lift at different times in their production life cycle, and the use of lift technologies also differs by play, with rod lift being used heavily in the Bakken, Niobrara, and Eagle Ford plays, and ESPs used on a more limited basis. Weatherford is the only firm that can offer an integrated solution within this niche, where it benefits from scale efficiencies. As a result, Weatherford ranks as a leader in the integrated rod systems, progressing cavity systems, and North American gas lift markets.
This industry leadership is beneficial because of the 20-30 year opportunity to land regular work throughout a well's life cycle. Artificial lift and its related services, production optimization, should be considered similar to aftermarket product lines where the need for work is consistent over a very long period of time. Weatherford's leadership in artificial lift pulls through more work for Weatherford's production optimization efforts, too. The opportunity begins with the installation cost of the lift (the razor), and continues with lift replacements and optimization efforts (the blades) throughout the life cycle of the well. This opportunity set is interesting, as 90% of today's wells do not use sensing technology.
Weatherford has roughly 350,000 wells on its operations platform, which includes 70% and 75% of the top natural gas and liquids producers in the United States. For these wells, Weatherford monitors, analyzes, and controls well production using an integrated hardware and software solution. The solution is a combination of sensors, real-time analytics, and artificial lift products.
The firm typically provides operators with information on current production levels, how to improve hydrocarbon recovery rates, water encroachment levels, and ways to optimize costs through prolonging the life of well equipment. Typical products might measure pressure, temperature, and flow levels that can be monitored through a remote intranet system. The end result is that Weatherford can better optimize production and costs, and provide more information to operators. We think this service is growing more valuable around the world as more wells are being drilled in inaccessible and remote areas where the cost of failure is high.
The opportunity for Weatherford in North America is also attractive. Demand for the artificial lift and production optimization product lines tend to come after the wells are drilled, with the initial installation of the lift taking anywhere from 3-6 months and possibly longer after the wells are completed. Thus, Weatherford is not going to see improved margins immediately, unlike pressure pumping, where prices have increased significantly alongside drilling activity levels.
The firm has indicated that about 25% of its North American revenue (and about 18% of the overall company's revenue) is made up of artificial lift and related products, which means a good chunk of its revenue base has yet to respond meaningfully to the increase in the number of wells drilled in 2011. We believe the effect of this delayed demand response could lead to Weatherford perhaps beating our 2012 estimates, depending on its ability to leverage prices.
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