The New Offshore Oil Paradigm

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 |  Includes: ACGY, HLX
by: Wealth Daily

By Adam Sharp

Offshore drilling is about to get a lot more expensive for producers.

And that has spooked some investors out of the entire sector.

I can understand being wary of offshore producers after the Gulf oil disaster... Any company extracting oil from the Gulf will see their costs rise dramatically.

New legislation, higher insurance premiums, and other factors will make oil production offshore less profitable going forward.

But it's a mistake to throw the entire sector out with the bathwater; increased costs for some mean more revenue for others.

So while offshore drilling is about to get a lot more expensive for producers, these stocks are poised to profit from the shift.

Two Offshore Stocks with Upside

1) Acergy Inc (NASDAQ:ACGY)submersible rovClick to enlarge

Ever wondered who pilots those submersible ROVs that provide BP's live oil spill feeds?

Acergy does — along with their newly acquired partner, Subsea 7.

When the Macondo well exploded in April, you can bet these guys were among the first calls BP made.

They've been on site since shortly after the disaster, providing remote operated vehicles (ROVs) and other services to assist in containment efforts.

Acergy is set to merge with Subsea 7 early next year. The new company will take Subsea's name and emerge as the largest subsea contractor in the world, boasting a fleet of 43 vessels, more than 120 ROVs, and 12,000 employees.

Subsea 7 invented the use of ROVs for oil & gas development back in the 80s. But they don't just drive high-tech remote-controlled subs around the sea floor...

The combined firm will offer a smorgasbord of services — including pipeline laying, exploration, subsea field development, riser construction, and engineering.

And the company looks really cheap at current levels. Investors have been spooked by the Gulf drilling moratorium, but only 4% of Acergy's business is currently in the Gulf.

If anything, their revenue from the Gulf will probably grow. The BP contracts alone will provide a nice chunk of cash.

Here are some key stats for Acergy*:

  • Market Cap: $2.5b
  • Trailing P/E: 12
  • Div Yield: 1.42%
  • Current price: $16.18
  • 52 week range: $8.89-$20.55

*Note: these numbers are pre-merger. The merged firm will be twice the size of Acergy, and dramatically increase efficiency with estimated savings of $100 million per year.

2) Helix Energy Solutions (NYSE:HLX)

Helix runs the Q4000, a fireball-machine currently incinerating 15,000 barrels of oil a day at the Deepwater Horizon site. Here's a picture of the Q4000 in action (source).

Q4000-oil-burniing-vessel

The fact that Helix was awarded this death-defying contract indicates extreme respect from industry peers. Flaring crude oil is not exactly an everyday operation.

But Helix stepped right up and has been doing a bang-up job so far, eliminating around 15,000 barrels per day that would otherwise be in the Gulf of Mexico.

Another Helix vessel, the Helix Producer, is scheduled to begin collecting up to 25,000 barrels per day from the blowout preventer.

Helix has been handed some of BP's most vital containment efforts. If they're smart, other offshore oil producers will be looking to do business with Helix.

Everybody needs to have a disaster contingency plan going forward, and they'd be smart to hire HLX on retainer.

Helix key stats:

  • Market Cap: $1b
  • Trailing P/E: 36x
  • Forward P/E (est): 7
  • Debt: $1.36b
  • Cash: $212m
  • PEG ratio: 1.3

Both Helix and Acergy look tempting at these levels. Of the two, I prefer Acergy. In fact I own it.

Other drilling contractors that I have my eye on include Schlumberge (NYSE: SLB) and Halliburton (NYSE: HAL), which has emerged as an unlikely hero from this disaster.

Halliburton contractors warned BP (NYSE:BP) about the well design and risks involved, suggesting the use of 21 stabilizers for the pipe. But BP didn't listen, ultimately using only six.