Along with its earnings release, Seadrill (NYSE:SDRL) provided investors with an update on the deep water drilling market. With its large and growing fleet of offshore drilling rigs, the company has a lot of insight into the demand from exploration and production companies. Let's take a quick journey under the sea with Seadrill as we catch a glimpse of what to expect from offshore operators over the next few years.
Drilling down into the depths
Last year was the best year ever for deep water and ultra-deep-water discoveries of oil and gas. Exploration and production companies announced 52 finds in water depths of more than 4,000 feet of water, which trounced the previous record by 40%. Of that total, 18 finds were in depths of more than 7,000 feet. This trend plays well into the hands of Seadrill thanks to the company's vast and growing ultra-deep-water fleet.
Overall, Seadrill sees a positive outlook for future drilling based on the success of the oil and gas industry last year, as well as the discoveries already made this year. It also sees a very tight market for global ultra-deep-water fleets. While 21 new units will be delivered this year, just two are without fixed contracts. Demand from Africa and the Gulf of Mexico were strong last quarter, and Brazil is expected to join those two later this year.
It should come as no surprise that demand for ultra-deep-water rigs is strong in the Gulf now that the industry is finally moving past the BP (NYSE:BP) disaster. Oil companies have been investing heavily in the region and those investments are starting to bear fruit. Earlier this year ConocoPhillips (NYSE:COP) and its partners announced two major oil discoveries, Shenandoah and Coronado, which could be added to as the company plans to drill another five wells this year. The company has amassed over 2 million net acres in the Gulf, a position it recently added to as the company was the highest bidder on 30 blocks which added 172,000 net acres to its position. Needless to say, Conoco is expecting big things from its investments in the Gulf.
Conoco, though, is fairly new to the Gulf, and its new entrants like Conoco which are helping to drive some of the increased spending from oil and gas companies. But the financial and operational risks are a significant barrier to entry for smaller players. That's part of the reason why Seadrill's order backlog is filled with larger exploration and production companies; for example, BP has contracted 24% of Seadrill's $19.1 billion backlog.
What Seadrill does see for small and midsized companies is that these operators will look to sign short-term contracts for exploration drilling. Larger companies like BP will counterbalance this with long-term drilling campaigns. Overall, Seadrill expects oil companies to continue to increase their budgets and spending on ultra-deep water by double digits. The company sees a strong trend here which also bodes well for competitors such as Noble Corp (NYSE:NE) and Transocean (NYSE:RIG).
Here, though, Seadrill sees exploration companies looking to replace older drilling rigs with the most modern equipment. Seadrill has a very young fleet with its ultra-deep-water units having been built after 2000. Overall, its fleet is still smaller than Transocean's, which boasts 29 ultra-deep-water rigs in service while Seadrill currently has 16. However, Seadrill has a much more robust newbuild program than all of its competitors. Meanwhile, Noble sees ultra-deep water becoming a major contribution to its revenue; it's expected to grow from 24% in 2011 to 40% of Noble's revenue in 2015. The trend here is clear: Oil companies are increasingly looking to drill in deeper water to find oil, which means lots of future revenue and profits for contract drillers.
Foolish bottom line
Seadrill is in a prime position to take advantage of the massive growth in deep water drilling over the next few years. The company has a young fleet that it's aggressively growing, yet prudently securing though a large backlog of contracted revenue. When you add in the company's equally large dividend, there's a lot to like when looking at Seadrill.
Fool contributor Matt DiLallo owns shares of ConocoPhillips. Matt DiLallo has the following options: Short Jul 2013 $35 Puts on Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.