2 Ways To Play The Deepwater Renaissance

 |  Includes: ATW, DO
by: Oil & Energy Daily

Deepwater oil and gas exploration is blowing up to previously unseen levels. A recent Wood Mackenzie report concludes that current offshore deepwater drilling activity - in an upswing since the Deepwater Horizon disaster - is going to increase exponentially for many years to come.

Indeed, the amount of money spent on deep-sea wells is expected to grow from $43 billion today to more than $114 billion by 2022. That's a 265% increase in less than 10 years.

Furthermore, the number of deepwater wells will balloon more than 150% - from 500 to more than 1,250 over that same time period. This should come as no surprise.

As the consultants point out, deepwater rigs have historically accounted for 41% of all discovered oil - and have created more than $351 billion in value - surpassing shallow and onshore production by a sound margin.

For investors looking to take advantage of this growth in offshore activity - the most direct play would be companies specializing in deepwater drilling - the ones set to benefit directly from an increase in demand.

Companies like Atwood Oceanics (NYSE:ATW), for instance.

Going Deep

We've written about Atwood before, as it's one of the fastest-growing companies in the deep-sea drilling business. The company's fleet boasts five ultra-deepwater rigs, three deepwater submersibles and six jack-up rigs for shallow water drilling.

These rigs are operating not just in the Gulf of Mexico, but the Mediterranean, West Africa, Southeast Asia and Australia. And more are already being built to keep up with rising demand. Increasing demand for drillers has allowed ATW to post some pretty impressive numbers.

The company just reported a 52% increase in second-quarter revenue, which climbed to $272.7 million. And net income for the quarter jumped more than 74% to $90 million. Yet, as good as these numbers are - they could be getting a whole lot better.

With an average day rate of roughly $650,000 for ultra-deepwater rigs, Atwood's new drill rigs represent potential revenue of more than $2.5 million per day - or an additional $912 million per year. The stock currently sports a P/E ratio of 11, making it relatively cheap compared to the rest of the industry. And the mean analyst price target is $65 - a 16% premium to where shares currently trade.

Of course, with global demand skyrocketing, and the addition of the new rigs, you could expect to see even better performance.

A Diamond in the Rough

Another company to look at is Diamond Offshore (NYSE:DO).

Like Atwood, Diamond Offshore provides contract deepwater drilling services for exploration and production wells. DO's fleet is considerably larger than ATW's - with 12 ultra-deepwater rigs, seven deepwater rigs, 18 midwater rigs and one jack-up rig.

And like ATW, DO has also contracted for the construction of several new rigs, including four ultra-deepwaters and two deepwater semi-submersibles.

DO also posted a strong second quarter, with revenue of $758 million, compared to $738 million the year prior. Though net income per share was down to $1.33 per share, compared to $1.45 a year before, the four new deepwater rigs alone, at current day prices, could produce a sizable increase in revenue.

At $68, shares are trading just above the 52-week low of around $64. Short-term price targets of $72 would mean a modest bump of 5% from current levels. But that's short term, and these two stocks aren't short-term plays. Both are strong, long-term plays on the growing global demand for deepwater drilling. And both are in perfect position to milk that demand for all it's worth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.