“Over the years, there were a heck of a lot of speculators blown up. You would find body parts all over the trees in these woods.” — Rick, “the Explosives Guy”

Those were the words uttered deep in the woods of Titusville, Pa., this past weekend. That’s where I was — along with Greg Grillot, Byron King and Joel Bowman of Whiskey & Gunpowder and Rude Awakening — to see how oil is extracted from one of the world’s oldest stripper wells. (Hint: It involves enough explosives to send my body parts deep into the woods…)

A stripper well is an oil well that produces less than 10 barrels of oil a day. They are the smallest of wells…the kind most investors wouldn’t waste their time even thinking about. And that’s exactly why I couldn’t wait to get up there. I wanted to see what no one else will “waste” their time checking out.

Turns out, it was not a waste of my time at all.

The stripper oil wells in Titusville produce an average of four barrels of oil a month. That’s nothing compared to a large oil producer like ExxonMobil — which cranks out 2.5 million barrels a day. But when you add up the production of all the tiny stripper oil wells in the United States, they spit out 15% of all the oil the United States consumes. In other words…

These little wells play a massive role in the entire U.S. economy. And the guys who run them — breaking their backs for a few liters of oil a day — can teach any investor a thing or two about making money. Every day, they have to find ways to literally siphon drops of oil — just to make a dime in profits. And any service company that can help these oil guys make a profit is invaluable in today’s world of $60 oil. Heck, I saw that firsthand.

Rick, who invited us up to Titusville, is an oil service provider himself. His tiny business, Otto Cupler Torpedo Co., makes propellant explosives — the kind that you lower deep beneath the earth’s surface to ignite cracks in the rock and sandstone to release oil. He not only supplies the explosives, but he also comes out to the oil site and makes sure the blast goes off as planned.

And that’s exactly what he did on Saturday.

Rick brought 70 pounds of propellant explosives encased in a blue PVC pipe to a small stripper oil well in Titusville. He attached 880 feet of wire to this bad boy and helped the crew lower it into an oil well that was over 900 feet deep. (They only lowered it to about 869 feet underground). When everything was set, Rick yelled at the top of his lungs…

Stripper Wells: Press the Button

“Fire in the hole. Fire in the hole. Max, press the button.”

When Max pressed that red button, Greg, Byron, Joel and I were prepared to dive into a wooden shack. We were warned that invisible sandstone could come whirling out of the well. We were told a geyser of oil, water and debris could rise into the sky — drenching us with expensive goop. And we were told that every molecule in our bodies would likely vibrate.

YEAH!! The four of us were giddy with excitement.

Seconds later, Max hit the red button. We waited…and waited…and waited. But nothing happened. There was no geyser of oil. There was no invisible sandstone pelting us in the head. And I didn’t feel anything vibrate — let alone every molecule in my body. Still, Rick was going nuts. He was clapping, smiling and congratulating everyone on the site.

What the heck? Was he smoking something?

Turns out the explosion went as planned. Since it was so far underground, we didn’t feel or hear a thing. And because there was a bit of water in the well, there wasn’t enough pressure from the blast to send oil shooting out of the well. But all was a success nonetheless…

As we got closer to the well, we could see natural gas fumes pouring out of the 7-inch opening in the ground. (Turns out that natural gas is used to provide electricity for the oil well we were at). And after the water and debris were extracted out of the well, we saw what we came for…green Pennsylvania crude.

Several gallons of the sweetest crude on earth were pulled out of the ground using a rusted drill rig that towered above the trees. This oil is worth more than any oil you’ll find in Texas, Canada and even the Middle East. This is the best stuff on Earth, no question. In fact, Byron told me you could practically take this green oil and put it into your car — if you were in a jam. That’s how sweet this oil is.

As you can imagine, Rick was happy. His explosives did their job, and he got paid. The oil well owner was happy. He got oil. And we were happy — despite no geyser.

Stripper Wells: Four Companies on the List

So how can you get paid from all of this?

Well, you can’t invest in Rick’s company. He is a tiny private business owner. But there are 52 oil service providers on the Amex, Nasdaq and NYSE right now. Thirty of them have market cap under $1.5 billion. But most are highly leveraged — meaning they have large debt loads. And believe it or not, two of them have negative growth rates.

I ran a simple screen for you this morning — to separate the companies you might want to look at from those that you probably should avoid.

I looked for companies with a debt-to-equity ratio of 0.5 or less — meaning they aren’t heavily leveraged relative to their peers. I insisted on 25% sales and earnings growth — which you should expect in such a boom period for anything oil related. And on a value basis, I looked for companies with a price-to-book ratio under the industry average.

Here are the four companies that made the list…

– Bolt Technology Corp. (BTJ:AMEX)
– NATCO Group, Inc. (NTG:NYSE)
– Lufkin Industries, Inc. (LUFK:NASDAQ)
– Dril-Quip, Inc. (DRQ:NYSE)

If you are interested in investing in a few oil services companies, start by looking at these four.

With oil prices as high as they are now, every mom-and-pop oil well company will need explosives, wires, holding tanks, tankers, etc. That’s why the services companies are a better bet than owning the oil companies themselves.

If a small oil exploration company takes a risk, drills a hole in the ground and comes up with nothing — you can bet its stock price will fall. And if you happen to own that stock, you will lose money. Pure and simple.

But boom or bust, the oil companies will need services. They will need explosives, drills, wires, tools, etc. In other words, these companies will provide “things and services” to oil companies that find oil…and those that strike out.

That seems like a much better business to be in, if you ask me!

Cheers,

James Boric
November 17, 2005

Stripper Wells: Fire in the Hole was originally featured in the Penny Sleuth.