A Pair of Leggy Drillers

It's not a new message from T. Boone Pickens, but it's a difficult one to refute. For a while, Pickens has been circling North America sharing his thoughts about the phenomenon of peak oil. The term refers to the point at which our planet's increasingly voracious appetite for oil begins to exceed the ability of the world's oil companies -- private and government-owned -- to produce it.

By Pickens' reckoning, that point is less than a year away, as he noted in a speech last week in California. But just about exactly two years ago, addressing a National Clean Cities conference, Pickens said, "Global oil (production) is 84 million barrels a day. I don't believe you can get it any more than 84 million barrels ... I think they are on decline in the biggest oil fields in the world today, and I know what it's like once you turn the corner and start declining. It's a treadmill that you just can't keep up with... So, when you start adding the reserves (in the producing nations), you're not even replacing what you're taking out."

Lest you think that Pickens is a crank whose knowledge of energy has been obtained on the sidelines, allow me to point out that he began working as a roughneck in the oilfields of Texas and Oklahoma in the early '50s, became a geologist in the employ of what is now ConocoPhillips (NYSE: COP  ) , and later founded what ultimately became Mesa Petroleum, a sizable independent oil and gas producer. In the '80s, from the Mesa platform, he made noteworthy takeover runs at much larger companies, including Gulf Oil. (After he'd accumulated a slug of Gulf shares, it was joked in Texas energy circles that he'd put together a "T. Boone stake" in Gulf.)

Today Pickens is heading for 80, but he's hardly slowing down. His BP Capital Management is a $4 billion Dallas-based energy hedge fund that reportedly made $1 billion last year. Indeed, it's said that the fund has made more money for Pickens since he founded it after he turned 70 than he'd accumulated in all his prior working life. One of the largest beneficiaries of his success has been Oklahoma State University, his alma mater, to which he's donated hundreds of millions of dollars.

It's in the planets
Pickens' assessment of the world's energy situation becomes particularly daunting when juxtaposed with predictions by most knowledgeable prognosticators, who believe that energy demand growth -- led by the increasing needs of the developing nations -- will move to about 120 million barrels a day by the time today's newborns are finishing college. And while I'm not certain that I agree with Boone's assessment (I've met him on a couple of occasions, so I'll take first name liberties here) that our daily production has completely topped out, I nevertheless think we'll produce 120 million barrels a day sometime after we colonize Mars, Venus, and Jupiter.

However, it's not my intention to inflict this sobering message upon you without what I hope you'll think are countervailing gifts in the form of a couple of interesting oilfield services investment ideas. Both are offshore drillers, and while their names -- GlobalSantaFe (NYSE: GSF  ) and Ensco (NYSE: ESV  ) -- are familiar to Fools with an interest in energy, they sometimes get shunted aside in favor of the justified attention that tends to accrue to deepwater darlings Transocean (NYSE: RIG  ) and Diamond Offshore (NYSE: DO  ) .

But before I proceed further, let me digress for the sake of perspective and quickly give you definitions of the three primary types of offshore drilling rigs: drillships, jackups, and semisubmersibles. Drillships, as the name implies, are ships that contain slots, or drilling areas, amid ships. Most are dynamically positioned so they won't deviate from their assigned location during the progressively more exacting task of hitting a specific drilling target.

Jackups actually have their three or four massive legs anchored on -- or actually slightly below -- the sea floor for ultimate stability. The drilling platform is then "jacked up" before drilling begins. The rig's composition provides ultimate stability, but jackups are limited to drilling in water depths of about 200 to 400 feet.

Semisubmersibles are floating rigs that contain ballast tanks that submerge part of the rig beneath the surface for stability when sea water is permitted to enter. With drilling now occurring regularly in depths that were unheard of 30 years ago, "semisubs," which typically can operate to depths reaching about 8,000 feet or even more, are huge structures with deck areas about half the size of a football field, and costing up to about $200 million.

Lots of legs
Ensco and GlobalSantaFe own and operate semisubmersibles and jackups, although both are weighted to the latter; hence, their occasionally lower-star quality than Transocean and Diamond, which have larger quotients of deepwater "floaters." Ensco, for instance, owns 43 jackups, which operate in most of the world's energy horizons. But it only has one ultra-deepwater semisubmersible, although three 8,500-foot semis are under construction for the company.

Unlike most of its peers, which are headquartered in Houston, Ensco is Dallas-based (its former CEO preferred the north Texas city). More importantly, the company trades at a forward 2007-based P/E multiple only slightly above 8 times, while its PEG ratio is an almost-unheard-of 0.35. Furthermore, its enterprise value to EBITDA ratio stands at only 6.3. Finally, and despite the costs it's incurring in the construction of the expensive new semisubmersible rigs, its balance sheet could be described as pristine.

GlobalSantaFe also operates a sizable fleet, including 43 cantilevered jackups (the specific meaning of which we'll defer for another lesson), 11 semisubs, and three drillships. Its rigs also operate around the world, generally in places you and I wouldn't select for vacation venues. And while most of its contracts are of the traditional "dayrate" variety, wherein the explorer-producer customer assumes the generally mechanical risks associated with drilling, Global is also a leader in flat fee "turnkey" drilling, where the onus for overruns shifts to the contract driller.

Global's forward December 2007 P/E is only about 9.2 times, or significantly less than the general market, and its PEG ratio is also right on the 0.35 mark. It too has a balance sheet that many executives in other industries figuratively would die for.

So since Boone Pickens may be correct, or least close to correct, in his assessment of the world's declining energy picture, I'm convinced that Foolish investors should pay close attention to the soundly managed, quality companies in the oilfield services group. In that context, I also believe that GlobalSantaFe and Ensco deserve your careful scrutiny.

For related Foolishness:

•  An Energy Services Starter Kit

•  The Most Global of Businesses

•  ExxonMobil Works to Bulk Up

Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your comments or questions. The Fool has a disclosure policy.


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