Best Year Ever for Deepwater Discoveries

With the price of crude oil averaging $100 a barrel for the past three years it's given exploration and production companies the incentive needed to drill. Energy companies have responded by investing billions of dollars around the globe. In 2012 those investment paid off big time.

The gusher
According to Noble Corp  (NYSE: NE  ) , 2012 was best year ever for deepwater and ultra-deepwater drilling environments. E&P companies announced 52 finds in water depths of more than 4,000 feet. This smashed the previous record by 40%. These discoveries were found increasingly in ultra-deepwater locations with 18 of the finds in water depths more than 7,000 feet while nine more were found in water depth greater than 8,000 feet. 

The shifting geography
One reason for the industry's banner year is that the discoveries were found in more widespread geographies. Traditionally the "Golden Triangle" of the Gulf of Mexico, West Africa, and Brazil has dominated the deepwater discoveries. This past year discoveries were made off the coasts of 14 different countries with Israel, Australia, and India gaining in prominence. All total, the "Golden Triangle" dominance dwindled from contributing 80% of discoveries in 2008 to recording less than half of the discoveries in 2012.

This trend is showing no signs of abating, as new geographies will likely only gain more prominence in the years ahead. In particular, new finds off the coasts of African nations such as Mozambique and Tanzania will drive that continent's growing importance over the coming years. The discoveries won't end there with increased deepwater drilling activities in the Middle East and Asia also continuing to gain steam. This success is not only good for the bottom line of E&P companies, but suppliers and services providers as well.

A wellspring of profits
This is all leading to a new paradigm for contract drillers. Companies are now signing longer contract lengths with drillers at higher rates, which equals greater visibility into future revenue. Noble, for example, is seeing the average length of an ultra-deepwater rig contract of 3.3 years, up from the average 2.2 year contract length the company was signing in 2011.

These trends will extend to industry peers, all of which are enjoying multibillion dollar revenue backlogs. Ensco (NYSE: ESV  ) had $9 billion of contracted revenue backlog as of the end of the fourth quarter. Transocean's  (NYSE: RIG  )  backlog ballooned $8.3 billion in its third quarter alone, and stood at $29.7 billion. Finally, Seadrill  (NYSE: SDRL  ) , which is in the midst of a massive newbuild program, has built its own contracted backlog to $21.3 billion. That highly visible backlog has given Seadrill the ability to take on a meaningful amount of debt to aggressively build out that fleet while also paying an industry-leading dividend. 

Don't forget the supply chain
Contract drillers aren't the only companies excited about the growth in deepwater drilling. Top equipment supplier National Oilwell Varco  (NYSE: NOV  )  is also poised to cash in as companies continue drilling offshore. The company is a leading equipment provider for FPSOs (Floating Production, Storage, and Offloading ships), which will become even more important as drilling takes place in more turbulent waters. Few companies are better-positioned to profit from of the opportunities found under the sea.

That is just one reason why National Oilwell Varco is perhaps the safest investment in the energy sector. The company has amassed an industry-leading 60% market share in providing the industry with critical components and services. It is a company that poised to profit in a big way as its customers are both increasing the number of new drilling rigs as well as updating an aging fleet of offshore rigs. To help determine if NOV is a nice fit for your portfolio, check out our premium research report with in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now and claim your copy today.

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