Petrobras is Hoarding the World's Deep Sea Drillers

Wow, interesting factoid via Bloomberg - Petrobras (PBR) has leased 80% of the world's deepest sea drilling rigs. I mentioned when I sold off Diamond Offshore Drilling (DO) I was very interested in moving that money (on a pullback) to Noble (NE) due to its Petrobras connection [Apr 25: Bookkeeping: Selling Diamond Offshore Drilling - Will buy Noble Later] but frankly it looks like every driller is going to have a Petrobras connection at this rate. Again, Petrobras in my book, will become the largest company (by market capitalization) on the planet (surpassing Exxon) [May 13: Petrobras (PBR) Business as Usual]

Why do we care about this news? We like... no... love shortages (as investors). Shortages create higher prices. Shortages of deep sea rigs mean higher prices for rig operators - think Transocean (RIG), Diamond Offshore (DO) and Atwood Oceanics (ATW) specifically. Also some Pride International (PDE) and Noble (NE) thrown in there....

• Petroleo Brasileiro SA, Brazil's state-controlled oil company, leased about 80 percent of the world's deepest-drilling offshore rigs to explore prospects including the Western Hemisphere's biggest discovery in decades.
• Petrobras, as the Rio de Janeiro-based company is known, is hiring rigs that can drill in at least 3,000 meters (9,800 feet) of water, Chief Executive Officer Jose Sergio Gabrielli said in an interview last week. The world has 21 such vessels, according to Rigzone.com, which tracks the offshore drilling industry.
• The company's ``insatiable'' demand is forcing producers including Exxon Mobil Corp. and BP Plc to pay more as they compete for the remaining units, said Kjell Erik Eilertsen and Truls Olsen, analysts at Fearnley Fonds AS in Oslo. Explorers that don't have rigs under contract may delay projects or pay rents of more than $600,000 a day.
• Petrobras is negotiating for as many as 17 more vessels to probe the Tupi discovery and neighboring fields, said Bill Herbert, an analyst at Simmons & Co. International in Houston. The company already controls almost seven times as much capacity as the next biggest user of rigs that can drill in 7,500 feet of water, according to research by Dahlman Rose.
• U.S. and European oil companies probably will pay $50,000 more per day to lease deepwater rigs during the next three years because Petrobras has already contracted for so much of the worldwide fleet, Nokta said. Such units are designed to cope with high seas and hold equipment needed to bore beneath the seafloor and identify oil and gas deposits as much as 6 miles below the ocean surface.
• Petrobras has signed leases this year for six deepwater rigs, more than twice as many as any other producer, according to Dahlman Rose. The contracts have an average duration of five years and four months at rates of $410,000 to $580,000 a day.
• Exxon Mobil leased Seadrill's West Polaris unit last month for $600,000 a day, Nokta said. BP agreed on May 1 to pay $540,000 a day for a Pride International Inc. drillship, $60,000 a day more than the company committed to three months earlier for an identical Pride rig, he said.
• Petrobras plans to start pumping oil in the first quarter of 2009 from Tupi, the biggest find in the Americas since Mexico's 1976 discovery of the Cantarell field in the Gulf of Mexico. Petrobras also is evaluating as many as seven nearby fields, including the Carioca prospect, Gabrielli said.

Folks we are not running out of oil; but we are running out of oil at easy, cheap to get to places. Much of Petrobras' discovery is in oceans at depths of 4-5 miles. Very few rigs on the globe will have capability to drill there. Most large caps mutual funds out there are loaded with the Exxon's (XOM) of the world (yawn) - they are stuck in the 1990s, and own an asset that is only benefiting from higher crude prices - not an ability to meaningfully expand production in the coming decade. The 2010s will be Petrobras era; that's what they should be owning. But they are, as always, behind the curve.

And for investment, you simply must own these deep sea oil drillers - I believe both Atwood Oceanics and Pride International will be bought out within 18-24 months, the latter already looks well on its way [May 2: Restarting Pride International as Takeover Bait]

That said, the next time crude corrects to $110 you will see all these stocks hammered as if the next 3-5 year story is over. That's lemmings for you.

Disclosure:Long Petrobras, Pride International, Atwood Oceanics in fund; long Pride International in personal account

Comments

[e chang]

Good article. Right on.

[BrianPursley]

RIG is the most undervalued stock in the world.

[richjoy]

Probably the "most undervalued stock in the world" is a stock you (and few others) have heard of, so is likely a bit excessive.

RIG, on the other hand, is well known, touted daily (and almost as loudly as you have), and well-subscribed.

However, your point (RIG is a good investment) appears correct.

[JJTERRITO]

I'm retired from Medicine after 50 years.During my career I was actively involved in domestic oil production.Policy Makers have myopic vision as does the American Public.The biggest mistake of the 80's was the plugging of more than 300,000 stripper wells.The second mistake foisted on the public by misguided do gooders is the prohibition of drilling on Federal Lands.Imagine the Royalty income state and the Federal Government is losing.

[huangjin]

What about support companies like Tidewater?

[BrianPursley]

If you double RIG's market cap, p/e, and p/b, it'll still be cheaper than SLB.

[Kezorm]

Regarding a correction to $110... it is possible that won't happen. Consider Goldman's prediction of a $141 barrel cost average for the 2nd half of the year. If Goldman sees the imbalance of supply and demand sufficient to drive the price that high, then there may be too much tension in the rope, so to speak, to enable a correction as deep as $110.

[User 190021]

Bring on the windmills, fast! Irrelevant entry? So, make something out of it.

[Spicer]

This article is contains a few errors, inspite off the fact that it's mostly a copy-past from a Bloomberg article.

Noble Corp(NE) is a driller, Noble Energy (NBL) is an E&P company and a spinoff of Noble Corp.

Atwood doesn't own a single rig that capable of operating at depths above 5000 feet, so what does it have to with Tupi, Petrobras or ultra dep water drilling. Ensco(ESV) has a much greater exposure than Atwood to the (ultra) deep water market.

"Much of Petrobras' discovery is in oceans at depths of 4-5 miles. Very few rigs on the globe will have capability to drill there. "

[url=www.bloomberg.com/apps...]From Bloomberg:[/url]
"The Tupi field is in a region that lies about 250 kilometers (402 kilometers) off the coast of Rio de Janeiro in water as much as 3 kilometers deep. The oil rests a further 5 to 7 kilometers below the ocean floor."
Thats about 2 miles of water and 3 to 4 miles of rock, sand and salt. So water depth 2 miles, total depth 5-6 miles. As the Bloomberg article you quoted (without quotation marks) states there are current 21 vessels capable of operating in those depths. Plus there are about as many under construction at various shipyards.

Exxon has a 40% interest in block BM-S-22 in the Santos Basin and is the operator on the block. Try googling BM-S-22. You might find the seismic data on that block interesting.

[url=www.bloomberg.com/apps...]The original Bloomberg article[/url]

[TraderMark]

Spicer,

Thanks for the correction on Noble - I wrote it as Noble Energy in paragraph 1, but Noble in paragraph two so it was an error in paragraph one (with correct stock symbol)

As for your 4-5 miles comment you are a stickler for words - I wrote "in the ocean" at "depths of 4-5 miles" - I didnt say "4-5 miles of ocean depth" - yes?

Correct on ATW - I believe they have 3 rigs doing 5k. Not being a wordsmith such as you are, my commentary was a general "ocean drilling" (not jack up) play. Not just the deepest drillers of which there are very limited quantities (21). When you move to the next group down, ATW would be thrown into that group (being a small player)

I suggest starting a blog, it fills the days much easier than picking through sentence structure and typoes ;) But I do agree on the ATW.

[TraderMark]

Spicer, if you go to RIG website you see many rigs of 5K depth that Transocean classifies as " other deepwater" as opposed to their select group of "ultra deepwater"

www.deepwater.com/fw/m...

Hence why I consider ATW to be ok to be a "deepwater" play with 3 of 8 rigs in that area.

That said, you are right about the usefulness of their application at Tupai

[tedstr]

Is it just possible that Goldman is way long oil is is just perpetuating this speculation that is going to burst sometime soon taking these drillers with it.

[boubou]

No mention of Seadrill (SDRLF).
It's worth a look.

[tradewizrd]

Believers ought to "follow the money" and examine other consequences to Brazil's massive oil finds, should they prove out. The entire Brazilian economy could boom, like the Persian Gulf states did, first in the late 70's, and again recently. EWZ for a start, while starting real work on individual companies there.

[paulk8756]

Yeah, Brazil sure has their game together, no doubt about it! After their initial '70's oil shock, they converted much of their domestic transportation to run on low cost sugar based ethanol. Now they're on the verge of becoming the next OPEC.

We could be in a similar position, except our Congress has a ban on domestic offshore oil and gas exploration. So we'll never know if we could become energy independent. The only thing we know for sure is we'll be buying $6-8 a gallon gasoline from Brazil.

[akapital]

if we are to blame Congress or Gov't then we should simply hold them to same standard as Brazil - why didn't they mandate a conversion to ethanol or a similar alternative that is in abundance on our soil?

But then what is acceptable in Brazil and other countries would be met with anti-socialism rhetoric in ours...we don't generally accept gov't solutions

So then we might blame business (that's right blame the free markets)...if they are really free why wasn't anyone looking to make money off of alternative energies all these years?

Perhaps the truth is that both our minds and technologies are too slow to change but a country like Brazil can

[sunrises]

Hi Mark:

Thanks again for a nice article. So, when is your mutual fund expected? And, will the small investors be able to buy on the first day? :)

Rig is still a favorite for many of us. Sometimes, we just know which is a real value.

[SHABBAZZ]

RIO DE JANEIRO, May 26 (Reuters) - A shortage of drilling rigs and looming relinquishment deadlines have made Brazil's state oil company Petrobras delay tests on potentially huge subsalt finds like Carioca and move the rigs to other blocks.

Petrobras (PETR4.SA: Quote, Profile, Research)(PBR.N: Quote, Profile, Research) chief executive, Jose Sergio Gabrielli, said on Monday production evaluation tests would have to wait and expected no additional information on the Carioca reserve any time soon.

"We ceased doing tests on Carioca to fulfill the compulsory exploration program, so we don't have to relinquish areas," he told reporters. Some geologists say Carioca and three adjacent blocks may have probable reserves of over 30 billion barrels.

If no oil is found in blocks under concessions until a certain deadline, operators have to return parts and then the whole of the area to the government.

Gabrielli said the Bem-te-vi, or BMS-8, area, where Petrobras announced a light oil find last week, would also have to wait for new equipment to get more information about the crude accumulation. The rig from there has been transferred to another subsalt area, known as Iara, he said.

Exploration and production director Guilherme Estrella said that by the beginning of next year, Petrobras has to inform the National Petroleum Agency about oil finds in all the area with subsalt crude accumulations. The offshore area extends along the coasts of three Brazilian states.

"We have to present evaluation plans for all those fields by the end of 2010; we are running against time," he said.

Petrobras on Monday launched a previously announced plan to contract 40 drilling ships and platforms to operate in deep and ultra-deep waters by 2017.

[iansane]

What about the deep sea driller Drys purchased?