If someone were to sum up the story of oil over the past 30 years, it might go something like this: High spare capacity kept prices in check through the 80s and 90s, until around 2000 when China and India "came online." At the same time production from some of the big national oil companies began declining. Demand surged and prices shot higher. Higher prices spurred a frantic search for new supply, which in turn brought about new discoveries in North American shale and deep water oceans.
As demand grows and conventional, onshore oil fields age, activity will increasingly move to two places: offshore and the shale. This article will focus on two players I believe have a bright future in "new oil."
Mid-cap deepwater superstar Atwood Oceanics (NYSE: ATW ) is, I believe, in the best position of all deepwater rig operators to take advantage of this secular growth trend. Atwood's fleet is still relatively small, only sixteen ships, and the company has been around since 1969.
As a small, established company with experienced management, Atwood enjoys the highest margins and return on invested capital in this industry.
Despite increased need for deepwater drilling, the industry as a whole has had a tough last few years. The "Great Recession" of 2008-09, and then the Macondo accident of 2010 have both depressed earnings and have knocked out plans to build new ships. But now Atwood is "breaking out" with the rest of this industry. Last year earnings per share jumped 29%. So far this year, the contract backlog has grown by 73%. And the fleet is expanding too: Of Atwood's 17 ships, two are brand new with another one on the way and under construction.
So long as oil prices stay high, generally above $90 per barrel, deepwater will continue to thrive and Atwood will continue to be among the best ways to play this trend.
"Growth like a tech start-up"
US Silica (NYSE: SLCA ) is a silica sand supplier company. What does that have to do with oil drilling? Well, horizontal drilling requires sand as a proppant to force oil and gas out of the shale rock. And while sand may seem easy enough to find, processing and transporting it by the ton is a different story.
Enter US Silica, a mid-cap sand supplier with a market cap of $1.4 billion. As drilling in the US increases and advances technologically, US Silica will multiply its earnings. Here's why: As well laterals for horizontal drilling get longer, the amount of proppant sand needed for each additional well progressively increases. So each extra "stage" results in a proportional need for more sand proppant. In other words, proppant needed per stage increases as more stages are added to a horizontal well. US Silica is in a high service-intensity niche. Management expects to gain one percentage point of market share and fully double earnings by 2016. US Silica will do this by building two new plants, and greatly expanding capacity, between then and now.
Formerly just a sand producer for industrial purposes, US Silica has plants which are often right by the sand source, and always has a freight rail depot on site. So, unlike many new entrants, US Silica need not pay for trucking from mine to plant, trucking or transfer to a Class I rail station, or royalty fees. These extra costs represent a barrier to entry to newcomers.
Oil production is undergoing some major changes leading to the ascent of deepwater drilling and a renaissance of production in North America. And in fact, most of the big, traditional names in oil have largely missed out. The best ways to be a part of "new oil" are often in names that the layperson has never heard of. I firmly believe that Atwood Oceanics and US Silica are two of those names.