What "4 More Years" Means for Offshore Drilling

Offshore drilling access has taken a beating over the past four years, and despite the opinions of oil and gas companies, not all of it is President Obama's fault. BP's (NYSE: BP  ) oil disaster changed safety regulations and severed offshore drilling inroads the industry was making. With Obama's second term about to kick off next month, what can oil and gas investors expect over the next four years?

Change in oil drilling permits
When BP's Deep Horizon oil rig exploded in 2010, it killed 11 workers and spilled millions of barrels of oil into the Gulf of Mexico. It also changed oil drilling policy. Offshore leases, the rights the government sells to a company to access areas of offshore government "land," came to a screeching halt, and drilling leases slated for sale were no longer available. One year after the spill, only 12 new offshore leases were approved.

According to the Bureau of Safety and Environmental Enforcement, the Obama Administration issued 1,304 offshore drilling leases during his first term, compared to 3,317 leases President Bush approved in his second term. Permits for offshore wells, which allow a company to actually drill, also dropped. The number of offshore well permits fell from 1,316 under Bush's second term to just 515 so far under Obama, a difference of 61%, according to FactCheck.org.

But the past four years don't paint the entire picture of what's happened with offshore drilling over the past few months, or where it's going in the near future.

New leases and permits
In November 2011, the Obama administration laid out a new five-year plan for offshore oil and gas drilling. It opens up new and existing areas in the Gulf of Mexico and the Arctic Ocean, but still prohibits drilling on the East and West Coasts. Obama may have dramatically curbed offshore leases during his first term, but millions of new acres have been leased to oil companies just over the past six months. Back in June, the government auctioned leases for 39 million acres in the central Gulf of Mexico to oil and gas companies. The Bureau of Ocean Energy Management estimates that those acres contain 31 billion barrels of oil and 134 trillion cubic feet of natural gas. BP won the largest percentage of leases in that auction, with Statoil ASA coming in a close second.

Big players aren't the only ones with skin in the offshore game though. SandRidge Energy (NYSE: SD  ) bought Dynamic Offshore Resources earlier this year and gained interests in 250 offshore leases from the acquisition, mainly in shallow waters in the Gulf of Mexico. Offshore drillers like Seadrill (NYSE: SDRL  ) are benefiting from the new leases as well. Companies like BP, Total, and Petrobras pay Seadrill a daily fee, called a "day rate," to operate oil rigs. Seadrill currently operates about 66 rigs, with over a dozen more under construction.

At the end of November, the government will auction 20 million acres worth of leases in the western Gulf of Mexico, and this coming March, about 38 million acres in the central Gulf will be available. Some of the leases in the central Gulf will be in the coveted area of BP's Macondo well, where the 2010 disaster took place. The leases sold for the central Gulf could produce from 460 million to 890 million barrels of oil and up to 4 trillion feet of natural gas. Large projects like ExxonMobil's (NYSE: XOM  ) Hadrian field and Chevron's Jack and St. Malo projects are expected to help increase Gulf oil production by 28% by 2022, according to The Wall Street Journal.

But it's not just the Gulf of Mexico getting new offshore leases. Three lease auctions are planned for the Chukchi Sea, Beaufort Sea, and Cook Inlet, off Alaska's shores. Royal Dutch Shell is already in the Chukchi Sea with exploratory drilling vessels, but has failed a number of government tests that would allow it to actually drill for oil. ConocoPhillips (NYSE: COP  ) is also exploring the Arctic region, and the company is on schedule to drill its first well in the Chukchi Sea in 2014.

The Foolish takeaway
If you want to know if offshore oil drilling is going to slow down, the answer is that it already has. But that's only half of the answer. The Obama administration is offering more leases now than it has in the past, and the Bureau of Ocean Energy Management plans to hold 12 Gulf of Mexico lease auctions before August 2017.

The point isn't whether or not oil companies will get all the leases and drilling permits they want -- we know they won't -- but rather which companies will use the leases they have to bring in money for themselves and their shareholders.

BP, the Gulf's largest oil producer, is expected to keep that title into the near future. Its stock fell from $59.88 the day before the oil disaster to a low of about $27 three months later, but it's currently rebounded to $41. Some investors may consider this a good time to invest, given the lower price, but it may be too early for that.

Just a few weeks ago BP was slapped with a $4.5 billion fine from the U.S. government, along with potential future payments that could reach up to around $20 billion. BP also has a larger debt-to-equity percentage than competitors Shell, Chevron, and Exxon, and it loses when it comes to both operating margin and return on assets as well. And, as if things couldn't get worse for BP, the Environmental Protection Agency announced today that it is suspending any new contracts with BP because of the company's "lack of business integrity" in relation to the Deepwater Horizon blowout and the response to the disaster. Existing contracts will continue, but BP won't be able to start any new federal contracts or receive grants until it meets federal business standards. Taking all this into consideration, BP isn't a stock I'd want to get on board with.

Obviously, that doesn't mean there aren't oil stocks worth investing in. One of the more exciting plays in the offshore drilling space right now is Seadrill. To learn more about the strengths and weaknesses of this company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.


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