Who Needs Offshore Oil Drilling Anyway?

Includes: CGG, LUFK
by: Investment U

By Matthew Carr

The U.S. government can say whatever it wants. But the reality is this: The moratorium on deepwater drilling in the Gulf of Mexico is still in effect… in practice at least.

Since the BP plc (NYSE: BP) rig disaster last April, we’ve only seen one new deepwater drilling permit issued in the Gulf. And that came this week, confirming that Noble Energy (NYSE: NBL) can continue to work on its Santiago well.

But the overall slowdown flies in the face of the fact that the drilling ban was officially “lifted” in October.

And for some companies heavily dependent on the Gulf, the sustained slowdown is more than they can take…

Seahawk Drilling is Sunk

On February 11, Texas-based Seahawk Drilling announced that it would file for Chapter 11 bankruptcy. The company – spun off from Pride International (NYSE: PDE) in late 2009 – was the nation’s second-largest shallow-water driller operating in the Gulf of Mexico. Now it’s forced to sell a substantial portion of its assets to Hercules Offshore (Nasdaq: HERO) for around $105 million.

Obviously, Seahawk had all its eggs in one basket. But the bankruptcy is becoming a symbol for the continued halt on drilling in the Gulf. Particularly since Seahawk shouldn’t have been a victim of the drilling ban in the first place.

And Seahawk isn’t beating around the bush. It points the finger directly at the U.S. government…

The Blame Game

The continued lag on issuing new permits has vaporized Seahawk’s liquidity and ability to generate revenue. In the months following the BP disaster, we’ve seen only 37 shallow water permits issued. And only one exploratory permit has got the green light.

“I think it’s important to note that Seahawk was forced to seek strategic alternatives only after an unprecedented decline in the issuance of offshore drilling permits following the Macondo blowout,” states Seahawk CEO, Randy Stilley.

Now the bankruptcy is emerging as a rallying point for Gulf Coast lawmakers. Senator Mary Landrieu (D-LA) openly chastised the federal government and its “excruciatingly slow release of oil and gas permits.”

Landrieu states, “The most infuriating thing about [Seahawk's] announcement is that the shallow water industry was not placed under the President’s moratorium.”

So with the Gulf of Mexico pretty much out of the picture, what are oil investors to do?

Go West, Young Man!

The Energy Information Administration (EIA) estimates that production from the federal waters of the Gulf to decline by 250,000 barrels per day in each of the next two years.

But offsetting that decline will be increased production from the lower 48 states. And specifically, it’s due to the rich shale plays being developed.

For the first time in two decades, U.S. oil production is up, having increased by 10% in the last two years. And U.S. crude imports are declining – down 25% since 2005.

Consider just two areas:

  • North Dakota: Thanks to the Bakken Shale formation, North Dakota is now the fourth largest oil-producing state. And by 2017, North Dakota’s oil output may exceed 450,000 barrels per day, which would put it above Alaska’s declining onshore production. Over the past year, the North Dakota rig count has soared by 78% (up 178% if you go back to February 2008). And since 2007, the state’s oil output has tripled.
  • The Rockies: According to Bentek, there are now 352 rigs operating in the Rockies region. Of those, 222 are drilling for oil. Since the middle of 2009, the Rockies rig count has increased four-fold. And production from the Rockies is expected to nearly double between 2010 and 2014.

So the environmentalists can relax a bit – the oil industry doesn’t need the Arctic National Wildlife Refuge. North Dakota, Wyoming and Montana are more important to our nation’s energy future than Alaska.

This means another boom for oilfield product and service companies

Get on the Shale Wagon

In The Oxford Club Insight back in December 2010, I mentioned two companies – CGG Veritas (NYSE: CGV) and Lufkin Industries (Nasdaq: LUFK). Since then, both companies are up at least 35%.

It’s easy to see why.

Bookings for Lufkin’s Total Oilfield Division jumped by 27% during the fourth quarter, with strong interest coming from the Bakken and Niobrara shale plays. In addition, the company’s North American factories saw bookings for units and parts soar by 96% over the third quarter. And the division’s backlog ballooned by 203% over the fourth quarter of 2009.

Lufkin believes the high price of oil, coupled with continued investment in shale plays, will keep the onshore drilling outlook optimistic for the next couple of years.

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