As some readers of my articles know, for the past two months I have been "banging the table" (as they used to say) in identifying the underwater drillers as an overly beaten down category that will benefit from medium-term catalysts. The primary identified catalysts were changes, or expectations of changes, in producer behavior due to geo-political events (Iraq, Libya and Nigeria are all perceived as being much riskier than they were three months, six months or one year ago) and (producer) capital expenditure strategy. In August, I began (within the subgroup I chose to focus on), to identify the best positioned industry players, such as Seadrill (NYSE:SDRL), and those that may have short-term challenges, such as Transocean (NYSE:RIG).
While July and August brought some positive events, such as Mexico ratifying its energy deregulation, Petrobras seeking its first new rig in three years (SDRL second quarter commentary) and the $500 million contract for SDRL's West Jupiter (by Exxon Mobil (NYSE:XOM)), until recently, I did not have a "real-time" example to share that supported my thesis. Today, I would like to discuss Royal Dutch Shell (NYSE:RDS.A) and how its recent activities bode well for the underwater driller's.
As reported by television station KTUU and confirmed by Shell, the Company is moving ahead with a potential harsh climate development in Alaska's Chukchi Sea (the Arctic), a reversal of a decision only a few months earlier (January 2014) to suspend work on the project. According to RDS.A spokesperson Megan Baldino, Noble Corp's (NYSE:NE) Noble Discoverer and RIG's Polar Pioneer are to be used if the current plan is approved by the Bureau of Ocean Energy Management. It should be noted there is strong opposition to Arctic drilling by environmental groups.
At the same time RDS.A was moving forward in the Alaskan Arctic, the Company was selling energy rights on the US mainland, $2.1 billion sale of Haynesville, LA shale in August, and the sale of $600 million of Eagle Ford shale assets in May. The Financial Times and other media reported last week that Shell was close to a $5 billion transaction to exit several Nigerian oilfields and a pipeline, as "foreign companies retreat from sub-Saharan Africa". The RDS.A transaction follows a $1.5 billion sale by ConocoPhillips (NYSE:COP) in July. In 2013, COP suspended Arctic drilling plans; it will be interesting to see if COP follows RDS.A's lead in returning.
I'm not picking on RDS.A, but merely demonstrating how this Company, in the midst of leaving Nigeria, a major production area for many years, is choosing the Arctic Seas as a "safer" place to make its production bets. I am also highlighting, how major producers such as RDS.A and COP are increasingly leaving "risky", corrupt and unstable onshore areas.
Multiple drillers would benefit from increased Arctic activity. In addition to NE and RIG, SDRL has experience, through the Company's owned rigs as well as through its 70%+ owned North American Drilling (NYSE:NADL), in harsh environment offshore drilling and could be a beneficiary of an increase in drilling in areas such as the Arctic.
As an investor, I conduct research to identify positive trends, validate or disprove internal (and external) thesis and determine whether the risk/reward tradeoff is appropriate for my investment dollars. Given that perspective, I look forward to hearing about more producers reversing their decisions and opting for the relative safety of offshore drilling. It does say something about our world when the words "offshore drilling" and "relative safety" can be joined!
This article reflects the author's opinions and is not meant to be the basis of an investors' buy or sell decisions. All investors should conduct their own due diligence and make investment decisions solely on their research.
Disclosure: The author is long SDRL.