With the rise in oil prices and demand in recent years, investing in oil drilling has become increasingly attractive. The oil drilling sector has seen rapid growth, especially in regions like the Permian Basin in Texas. However, these oil investments also carry risks. Wise oil investors need to understand the economics of drilling firms, industry trends and potential downsides. Key factors to analyze include rig productivity, cash flows, and industry projections on supply and demand. By partnering with experienced drillers and diversifying assets, oil drilling investments can yield solid returns.
High productivity and cash burns plague shale drillers
The shale drilling sector has struggled to be profitable, despite booming production. As the Economist article explains, major shale firms have burned cash for years, while revenues lag. A key issue is that shale wells deplete very quickly, so constant investment is needed just to keep output stable. While individual shale wells can earn good returns, overall company returns are poor due to high overheads. The financial track record of shale drillers should make investors cautious.
New rigs meet stricter regulations for offshore drilling
For offshore drilling, new rigs built to meet tighter regulations after the BP oil spill are in high demand, according to the Zhihu example. With an aging global fleet and more offshore projects planned, ordering newer jack-up rigs can be profitable if sold to drillers before delivery. However, oil price volatility and speculative ordering remain key risks to monitor.
Geology and technology impact production sustainability
As the PDVSA case illustrates, geology plays a key role in determining the productivity of oil drilling assets. Venezuela’s heavy oil is far more difficult and expensive to extract than light oil. The productivity of individual wells is also a crucial factor shaping investment returns. In maturing fields like Venezuela’s, advanced enhanced oil recovery techniques are needed to maintain production. Understanding the geological constraints and technology requirements of drilling investments is essential.
In summary, oil drilling investments can provide solid returns but also carry risks like volatile oil prices. Investors should analyze the cash flows, productivity potential and breakeven costs of drilling firms and assets. Partnering with experienced operators and diversifying investments can help manage the risks inherent in oil drilling.