A New Paradigm in Drilling

The worldwide energy markets have seen massive changes the past few years. One major player believes there may be a new paradigm emerging in the offshore drilling space. While the space had previously been predominantly boom or bust, the CFO of one of the world's largest energy services firms believes its customers are taking a longer-term view in offshore drilling.

The new paradigm
In National Oilwell Varco's (NYSE: NOV  ) third-quarter conference call, CFO Clay Williams said:

What may be different now is the mind-set of our customers, who no longer dismiss new rig building out of hand, who are less constrained by the dogma of the last generation. This relatively new industrial paradigm, if true, signals a shift in thinking among our customer base that have the potential of generating somewhat steadier order patterns for our Rig Technology segment. Time will tell.

He clarified later in the call: "I think there's a growing level of comfort in rig building that wasn't there three, four, five, ten years ago and that's more what I'm referring to. They're not sharing something with us that long-range, although internally they may be considering it, but I get the sense they buy into this idea that worldwide production is going to continue to shift more and more into deep water."

An upswing of deepwater rig builds will allow production of deepwater oil to take off.

This shift into deep water can be seen all over. Currently, deepwater production makes up 7% of the world's oil production, that is expected to rise to 10% by 2020. If Exxon's (NYSE: XOM  ) 2013 Energy Outlook turns out to be correct, deepwater oil will make up an even larger percentage of world liquids supply by 2040.

Source: ExxonMobil 2013 Energy Outlook

The trend can also be seen in the many new discoveries being made in deepwater plays:

The list goes on and on.

While some people invest in the individual exploration companies, that business is fraught with risk. You are much better off investing in the suppliers to the boom. The best way to invest in the deepwater boom is in the companies that own and operate the rigs and then lease their services to the exploration companies. Motley Fool oil and gas expert David Lee Smith likes Diamond Offshore (NYSE: DO  ) , the second-largest offshore company, for its solid management and quarterly dividend.

Another favorite of The Motley Fool is Seadrill (NYSE: SDRL  ) . The company has one of the largest fleets of drillships and is currently scheduled to receive seven new ultra-deepwater drillships by the end of 2014. Seadrill will be in prime position to benefit from the shift to deepwater drilling.

To learn more about the strengths and weaknesses of Seadrill, as well as what to expect from it 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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  • Report this Comment On December 24, 2012, at 9:20 AM, artmuseum wrote:

    Thank u for this VERY important foolish article.

    I have been saying now for a year that SDRL at the very least [among drillers] should be considered a GROWTH stock

    for the good reasons you mention.

    I have issued a challenge some time ago to any fool = name just one so-called growth stock, a now-darling of Wall Street which

    1. Has assured/booked/bankable business stretching out for the next 3 or 4 years + beyond

    2. also a profit margin around 50%

    and

    3. A dividend yield over 4 to 5%

    So far no fool ever took up this challenge!

    SDRL reminds me of my early days on Wall Street 2 generations ago when my institutional customers, mostly insurance companies bot + held IBM stock for its 6 to 7% yield.

    SDRL has every opportunity to repeat IBM's phenom. transition from income to GROWTH stock.

    You see this first here, among my fellow fools.

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