Who Benefits From The Resurgent Deep Gulf Drilling?

Includes: ATW, DO, ESV, NE, RIG, SDRL
by: Stone Fox Capital

Raise your hand if you realized that by early 2012 there will be more deepwater rigs in the Gulf of Mexico than when the BP spill occurred. According to ODS-Petrodata, 40 deepwater rigs will be in the Gulf compared to 37 before the spill. As an investor and especially one that has invested in the sector, this news caught my attention as something the general investing public doesn't understand yet. So what stocks will be able to take advantage of this trend in 2012?

First, companies that focus on drilling deepwater wells in the Gulf could benefit the most with the rising demand and possibly less competition as many rigs fled the area. Second, any companies in the deepwater segment should benefit with rising sector demand and higher global utilization lifting all day rates regardless of location.

Some other interesting stats from the article also lend to better performance from stocks in the sector. They forecast at least a 50% increase in the amount of oil produced from deepwater fields by 2020. Also, the cost to produce oil from these fields has jumped to $60 a barrel, so whether you believe in peak oil or not, oil prices are unlikely to peak anytime soon.

Per the AP Energy report on Yahoo! Finance:

  • By early 2012, there will be more rigs in the Gulf designed to drill in its "deep water" - defined as 2,000 feet or deeper - than before the spill.
  • By early 2012, there will be 40 deepwater rigs in the Gulf, up from 37 before the BP spill, according to Cinnamon Odell of ODS-Petrodata. BP received its first permit to drill in late October.
  • In 2000, 1.5 million barrels of oil per day were produced from deepwater fields around the globe, or 2 percent of global production. In 2011, that number grew to 5.5 million barrels, or 6 percent of global production. By 2020, deepwater oil will account for 9 percent, according to IHS CERA.
  • Challenges like this have helped push the average cost of producing oil in the deepwater Gulf to $60 a barrel, according to IHS CERA, near the highest level ever. But with oil close to $100 a barrel, the expense is well worth it.

While researching the individual drilling companies listed in the US, it became painfully clear that reports on fleet locations, drilling depth capabilities and rig age weren't readily available for a reasonable cost (read free). In addition, companies and various reports don't always classify deepwater the same. Based on rough research, drilling location was eliminated as it generally doesn't provide any ultimate benefits (rigs can be mobilized to more profitable locations). The more important data is the fleet sizes, drilling depths and ages of rigs.

A confluence of events has recently made that date more important and has dramatically changed the landscape in the sector. First the Great Recession quickly crimped capital budgets causing companies to cut back on newbuilds. Second, the BP oil spill in the Gulf placed a greater emphasis on newer rigs with advanced technology. Hence companies headed into 2012 are faced with a vastly more complex drilling requirements and outdated ships. The ones that quickly pounced on new orders in 2010 and even last year will have an upper hand as some of the debt-laden companies are anchored by old rigs not desired by the industry.

Below is an analysis of the financial and rig situation of the domestic listed deepwater drillers.



Atwood Oceanics (NYSE:ATW) Diamond Offshore (NYSE:DO) Ensco (NYSE:ESV) Noble (NYSE:NE) Seadrill (NYSE:SDRL) Transocean (NYSE:RIG)
Market Cap $2,500 $7,680 $10,820 $7,630 $15,500 $12,280
Revenue -2011 $737 $3,310 $2,850 $2,740 $4,170 $9,080
Net Debt $230 $350 $4,600 $3,600 $9,360 $7,900
2011 Earnings $3.9 $6.5 $3.1 $1.4 $2.8 $1.6
2012 Earnings $4.9 $4.8 $6.0 $3.9 $3.2 $3.2
Forward PE 8.1 11.5 7.9 7.7 10.3 12.1
Rigs 10 46 76 65 47 134
Deepwater 4 22 20 18 14 43
Newbuilds 6 3 7 14 10 4
-Deepwater 3 3 4 8 5 0
-High Spec Jackups 3 0 3 6 5 4
One should not consider the rig data as 100% accurate, but rather a general view of each companies general situation. The information if very fluid, and as previously stated, each company has a different view on what classifies as deepwater.

Though outdated by 9 months, the table below has a good report on fleet ages. Reuters factbox on rig fleet age:

Operator Rigs Built Avg Age
Transocean 139 25
Ensco 69 22
Noble 62 29
Diamond 46 31
Seadrill 45 8
Atwood 9 26

The data suggests that the younger, less debt-laden companies are more attractive investments. Transocean (RIG), once the industry leader, faces a tough battle with old rigs, high debt, lack of newbuilds, and questionable management [See Transocean: When Dividends Fail]. Diamond Offshore (DO) faces a similar fate with even older rigs and limited newbuilds.

On the other hand, Atwood Oceanics (ATW) has an existing small fleet, limited debt and an aggressive newbuild program that will increase rigs by 60%. Seadrill (SDRL) has a young fleet, but very high debt. Ensco (ESV) and Noble (NE) provide decent scope and less aggressive newbuild programs, but better fleet age dynamics than Transocean and Diamond. As 2012 progresses, invest with the companies willing and able to invest in new rigs and modern technology. The companies saddled with rigs 20 to 30 years old will struggle to find contracts as new rigs come out of the shipyards. Watch for fleet age to become a much more important metric than fleet size. Seadrill and Atwood Oceanics are set up to be the leaders. Invest in them or any other company that makes an aggressive move in that direction.

Disclosure: I am long ATW.

Disclaimer: Financial data sourced from Yahoo! Finance while rig data was obtained from each companies fleet reports. Please consult your financial advisor before making any investment decisions.