If you are bullish oil, there are several ways to play it. The United States' shale plays have been getting the news, but there are also good investments in companies that gather oil from the ocean floor. On April 3rd, I wrote "Opportunity in Offshore Drillers:Ultra-Deepwater Drives Company Backlogs." This covered just companies that have the ability to drill in ultra deepwater. I have broadened this list to any company associated with offshore oil drilling and have listed companies with the largest growth from its 52 week low.
Hercules Offshore (HERO) is up 150% from its 52 week low. Twenty analysts estimate Hercules' growth will decline 21.7%, but expect growth of 16.1% next year. Hercules has beat earnings for four straight quarters. It specializes in shallow water services. Hercules has 50 jackups and 65 liftboats. It is the largest jackup provider in the Gulf of Mexico and fourth largest in the world. It is the largest liftboat provider in the world and does business on three continents. Hercules purchased Seahawk Drillings assets earlier this year. This move increased Hercules leverage to the Gulf of Mexico. I am not completely sold on Hercules as I would like to see a significant increase in Gulf of Mexico permits. Although its Seahawk purchase created synergies, Hercules could have some difficulties going forward.
Gulf Island Fabrication (GIFI) is up 125% from its 52 week low. It trades for 14 times forward earnings. The seven analysts covering this stock estimate a decline in growth of -1.1% this year and growth of 161.8% next year. It has missed earnings terribly the last two quarters. It trades for 14 times next year's earnings. some of these estimates may not matter as it is one of just three large United States fabricators. The last recession slowed the deep water rig build out, but there are no arguments that the world will have to utilize deep water drilling to meet long term energy needs. Gulf Island produces newbuilds, plus has the ability to repair or retrofit existing rigs. There are additional marine vessel opportunities this year. I think Gulf Island looks good going forward. The demand for deep water vessels and retrofits will only increase as the world economy improves. As a smaller company, it has a much higher risk/reward scenario than competitor, National Oilwell Varco (NOV), which is up 118% off of 52 week lows.
Helix Energy Solutions (HLX) is up 99% from its 52 week lows. It sells for 14 times next years earnings. Eight analysts estimate this year's growth to be 80.9% and 40% next year. Helix has beat earnings handily three out of the last four quarters. The Macondo disaster has created a difficult environment for business in the Gulf of Mexico. Helix reports this situation is slowly improving. It has developed the Helix Fast Response System. This system can collect up to 55,000 bpd in water depths up to 8,000 feet. Twenty four independent E&P operators have signed on to include this in future drilling permits. Helix has a strong backlog for its well intervention vessels. Robotics demand is recovering outside the Gulf of Mexico. Overall oil and gas production is estimated to increase this year. Sixty three percent of this is oil and 65% is deepwater. Its business should continue to improve as permitting in the Gulf improves.
Oceaneering International (OII) is a company I really like. It is up 88% from 52 week lows. It is selling for 18 times next years earnings. Growth is estimated at 4.9% this year and 23.8% next year. It has beat earnings estimates for four straight quarters. It sells for 18 times next year's earnings. I like Oceaneering because of its leverage to deepwater drilling. Most of the shallow reservoirs have been found so there will be a steady increase of deep exploration. This will increase need for remotely operated vehicles (ROV), which is the biggest part of Oceaneering's business. The Macondo spill hurt its ROV services and ROV tooling in the Gulf of Mexico. Even with this, Oceaneering is expecting operating income increases in these business segments.
- Subsea Products
Oceaneering estimates that tougher regulations in the Gulf of Mexico will increase need for its business. This includes decommissioning. The current floating rig expansion should create long term growth within its business. March 31st of this year, there was floater rig demand of 231 and supply of 263. Seventy floating rigs are currently on order. Thirty of these rigs are already contracted with a standard seven year term. Oceaneering has increased its ROV fleet from 125 in 2004 to 260 as of the first quarter of this year. This uniquely subsea leveraged company is well placed in the current oil demand environment and increased ultra deepwater drilling.
Atwood Oceanics (ATW) is up 86% from its 52 week low. It sells for 11 times next years earnings. Twenty analysts estimate Atwood will grow 4.8% next year. This is a long term play as the same analysts estimate it will grow over 10% per year for the next five. From 2005 through 2010 Atwood has a CAGR of 30% with respect to revenue. Over the same time frame, it has a CAGR of 57% with respect to net income. Atwood has invested in improving its fleet. This year, Atwood's fleet consists of:
- No Ultra Deepwater Rigs
- 3 Deepwater Rigs with an Average Age of 28 Years
- 3 Jackups with an Average Age of 15 Years
By 2014, Atwood's fleet will look much different.
- 3 Ultra Deepwater Rigs with an Average Age of 1.5 years
- 3 Deepwater Rigs with an Average Age of 31 years
- 6 Jackups with an Average Age of 6 years
Atwood has a current backlog of $1 billion. The oil market is creating a new dynamic in oil exploration. Easy oil is coming to a close, and because of this, ultra deepwater rigs and high spec jackups are in demand. Newer rigs are sought for these tasks as independent oil companies worry about another oil disaster at sea. Although I believe land based oil production will grow faster in the short term, watch the offshore drillers closely as they may be a better long term play.
This is a very broad list of offshore stocks. Some are involved in drilling, while others produce newbuilds or repair. What these stocks have in common is outperformance. Growth from 52 week lows is a growth metric. It does not show dividends paid to shareholders, such as Seadrill (SDRL) and its 8.1% yield.
The world economy has several factors creating a bullish environment for oil. If the economy slows, the Fed will have to do further easing, which will create inflation. This will in turn increase the price of all commodities. If the economy improves, the price of oil will increase on higher demand. The second factor I see with oil is supply and demand. OPEC is taking a stand at $100 oil. Saudi Arabia will increase production, but it will take time. I believe the price of oil will push higher, along with other commodities.