When it comes to selecting oil companies, competitive advantages typically come in the form of asset quality. A company with highly economic assets will often have shallower, lower-cost wells, higher returns, lower breakeven costs, and shorter payback periods.

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) has an undeniably high-quality asset base. According to Bank of Nova Scotia, eight of Crescent Point’s nine plays are located in the top 20 most economic oil plays in North America (ranked by half-cycle payout, or the time it takes a well to pay back its drilling costs at US$30 WTI).

Crescent Point has another major edge over its peers, however, that is less talked about—technology. Crescent Point was the first horizontal driller in Canada, and it pioneered technologies such as cemented liners (which allows producers to frack more rock and therefore obtain more oil), and now it is pioneering the use of a fairly old technology known as waterflooding, but on tight rock formations, which has the potential to dramatically enhance reserves and production and reduce costs.

Waterflooding reduces decline rates

Waterflooding basically refers to the use of water to increase the pressure within an oil reservoir. Typically, after a well has been drilled, the pressure within the reservoir gradually declines. One way to increase this pressure is by injecting water into the reservoir, which increases the pressure closer to initial levels and encourages oil production.

Crescent Point began experimenting with waterflooding back in 2008-2009, and initial pilot projects revealed encouraging results. Since 2011 Crescent Point has dramatically expanded its waterflooding program, increasing its water injection wells from 30 in 2011 to 285 currently.

The success of this program is evident in Crescent Point’s decline rate. Crescent Point largely produces using horizontal, hydraulically fractured wells, and these wells have extreme production decline rates. In the first year of production, daily production rates can decline by as much as 70% (compared to about 5% for more conventional production). This creates an issue, because high levels of capital are required just to offset natural declines to maintain production.

Waterflooding corrects this to an extent. Known as a secondary recovery method (drilling the horizontal well is the primary recovery method), converting a producing well to a water injection well has the effect of moderating the decline rate. This means a few things: higher daily production for longer, greater reserves (since more oil is ultimately recoverable), and less capital required to maintain production (which means more free cash flow).

The results speak for themselves. Crescent Point had an overall decline rate of 35% in 2011. Today, the decline rate is around 28%. Crescent Point stated in its recent conference call that this downward trend is set to continue throughout 2016 and 2017.

In 2016, Crescent Point is planning to convert 120 more wells to water injection—a 70% increase from 2015.

Waterflooding also reduces capital costs

The most impressive feature of waterflooding is its effect on capital costs. Converting wells to water injection results in extremely low-cost reserve additions and improved capital efficiency. This means that because the decline rates are lower, Crescent Point has to spend less capital to maintain its production, which means a lower cost per barrel of daily production.

Crescent Point estimates that in the Viewfield Bakken (its main production region) there are about 6.1 million barrels of oil in place per section, and using traditional horizontal drilling methods (of eight wells per section) would lead to about 19% total recovery, or 1.1 million barrels.

Using waterflooding could boost this recovery to 40% according to Crescent Point, or 2.4 million barrels recovered. This is a huge increase in the amount of oil that can be recovered, and considering it costs only about $400,000 to convert each well, the total cost would be about $3.2 million for eight wells. This $3.2 million would add 1.3 million barrels of reserves (from 1.1 million barrels), which works out to about $2.38 per barrel—an exceptionally low cost.

The ability to add low-cost reserves and maintain production at a low cost is a key competitive advantage for Crescent Point shareholders.

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Fool contributor Adam Mancini has no position in any stocks mentioned.