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Oil Production in the Gulf of Mexico Is About to Explode

Photo Credit: Apache

Three years ago an explosion in the Gulf of Mexico basically put a halt on oil and gas production causing many to wonder if the Gulf would ever come back. Today, a combination of high oil prices and recent major discoveries have producers scrambling to lock up additional drilling rigs to increase oil production. Current estimates have producers requiring another $16 billion worth of drilling rigs to handle future drilling in the Gulf.

What's driving demand?
Two major oil finds earlier this year in the Lower Tertiary part of the Gulf have oil producers excited; this part of the Gulf is the area that is expected to drive the demand for these additional drilling rigs. These wells are drilled more than 20,000 feet below the sea floor in water more than a mile deep. One of the partners in two of the most recent Lower Tertiary finds, ConocoPhillips (NYSE: COP  ) , has quietly amassed over 2 million net acres in the deepwater Gulf. The company was recently the successful bidder on 30 additional blocks which added 172,000 net acres to its position, giving the company plenty of room to explore for additional oil. What's most interesting about this is that ConocoPhillips is a relative newcomer to the Gulf. It's well-capitalized newcomers that are a driving force behind the Gulf's reemergence.

Other veterans of the region, such as Apache (NYSE: APA  ) , had been wading ever deeper into the Gulf. The company, which is the top producer on the shallower shelf region, had only received about 2% of its production from the deepwater region of the Gulf. That's likely to change in the future because the company is drilling seven deepwater wells this year. Like Conoco, it too was a recent high bidder on additional deepwater acres, adding five blocks to its acreage in the region. But, Apache did just announce its intentions to sell a large stake in its Gulf operations to a privately held operator; however, the company chose to retain a 50% stake because it remains excited about the potential. It's that potential that has producers confident that the Gulf's best days are ahead, which is illustrated in the following chart:

Source: Enterprise Products Partners

What's the play?
While investors could choose one of the oil and gas producers, there is a lot of risk involved. Dry holes are a distinct possibility, Apache's five wells last year met with a 60% success rate, for example. Not only that, but investors cannot forget about the possibility of another major oil spill. That's why drilling contractors, such as Seadrill (NYSE: SDRL  ) or Noble (NYSE: NE  ) , make less riskier plays, while the least risky of all would be an oil pipeline company like Enterprise Products Partners (NYSE: EPD  ) .

Looking at the contract drillers, the Gulf currently represents about 31% of Noble's business; however, it is positioning itself to capture even more of the ultra-deepwater marketplace as it transforms its fleet. In 2011, just 24% of its revenue came from ultra-deepwater projects, but by 2015 the company estimates ultra-deepwater will be 40% of its total revenue. This will help the company double its earnings.

Seadrill is also spending vast sums of capital to build out its ultra-deepwater fleet. Just last week the company announced it had ordered another four ultra-deepwater drillships. These vessels, which will cost about $600 million apiece and won't be ready until 2015, are capable of handling the harsh conditions of the Gulf. Seadrill expects these ships to eventually add to its contracted backlog, which will enable the company to keep its large dividend both flowing and growing.

The final play to keep an eye on is Enterprise Products Partners. The company has a terrific set of assets already in place, which it's leveraging to take advantage of production growth in the Gulf. One example of this is that it's repurposing part of an underutilized natural gas pipeline in order to take advantage of the growth of oil production. This type of project provides low-risk returns for investors, while also providing critical infrastructure to the Gulf's growing oil production.

Final Foolish thoughts
It's amazing what can happen in just three years. What was once thought of as an area in decline, the Gulf is now poised to double production by the end of the decade. Investors who get in on the ground floor should do very, very well.

The biggest driver of the explosive production growth in the Gulf is $100 oil. So, if you're on the lookout for some other currently intriguing energy plays to benefit from high oil prices, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.

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9/23/2016 4:00 PM
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