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Let me toss out the idea, and then we can take it apart and take a look at the pieces in the comments section at the end of this post.

I like a paired trade here. I would go long the common shares in Continental (Quote: CLR) and a short an equal dollar value in Petrobras (Quote: PBR).

Here is why.

This boils down to Onshore incremental growth story vs Offshore incremental growth story. Both company’s have stated their plans (CLR Presentation & PBR Presentation) on growing at a high rate via internally driven organic growth.

Since each is growing rapidly, via the drill bit, we can compare them to each other on a cost to develop each flowing barrel of equivalent oil. We have some commonality between like stories.

We can take that commonality, and compare and contrast the cost structures to produce them. However, for this simple blog post, lets just look at the quick and dirty facts that are obvious.

Not all BOE’s incrementally cost the same to develop.

Let’s compare two scenarios. The first is an onshore vs offshore drilling strategies.

In the case of onshore production, it is a lot cheaper to haul in standardized completion hardware, and build out the necessary production capacity incrementally. That is one well at a time, with the new production put on stream as take off capacity becomes available.

Onshore has very little learning curve left, in regards to unlocking new on shore oil & gas fields. The development of on shore fields has reached the turn key level in the US. The greatest issues today in onshore development is if there is enough takeoff capacity to get your product to a refinery cheaply. If not, can you still produce the well using temporary transportation means like trains, trucks and localized demand.

Offshore however, the newest & largest fields are in locations that have never been produced before. Typically, there are no pipeplines to tap into. Everything has to be installed in some of the most challenging locations in the world. Hundreds of miles from shore.  This causes off shore to have to design and build expensive technology that doesn’t exist yet, to solve new and original issues.

It’s not uncommon that a field is so far from shore that a dedicated floating facility will have to be created from scratch for that specific field. It may not have any use after this field. The new equipment is custom tuned to the specific demands of producing that oil at sea safely. While converted tankers can be used on smaller projects, historically a major field development needs a custom design for it.

The off shore tanker portion of the field FEED design requires years of expensive lead time, to build and break in the new production capacity. This process doesn’t always go according to plans.

A single mistake like what happened at Thunder Horse can cost billions of dollars in lost production, and redevelopment of new equipment.

Two Growth Stories

Continental is rolling out an onshore building program focused on lowering incremental costs, while expanding production in lower risk drilling strategies like shale, where the formation presence is already known.

Petrobras is developing the most expensive and technically some of the more challenging oil fields in the world. It is never cheap to develop new technology. The challenges to bring on new production in the deep salt offshore markets isn’t fully factored into the equity price in my opinion.

What it means

In simple terms, I would prefer to invest in a lower risk onshore developments, then to invest capital into higher risk capital intensive projects that will need to design new custom hardware, to work.

If you agree or disagree, tell me what you think in the comments section below.

Disclosure: Jack Barnes does not have a position in any stock mentioned in this article, at the time of this being published. This blog post is an example of the type of investment I will be looking to place in my funds under management, once compliance clears my new business for client accounts.