Deepwater Drilling Is Back With a Vengeance

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Back in 2012, the world's annual capital spend on oil and gas development projects passed the $1 trillion mark. This is a huge number, and it's only going to get bigger.

Indeed, ExxonMobil and Petrobras alone are expected to clock up $409 billion in capital spending through 2016. These two companies are not alone -- cash is flowing into oil and gas projects all around the world.

Chevron (NYSE: CVX  ) , for example, is concentrating its expansion within the Gulf of Mexico as the company targets daily production of 3.3 million barrels of oil equivalent per day by 2017. This is a gain of 27% from current levels. Jack St. Malo and Big Foot are spearheading this production drive and no, they are not nicknames for company directors, they are in fact two new oil rigs under construction at the Kiewit Fabrication Yard in South Texas. The two rigs are heading for the Gulf to commence production sometime next year and are part of a $12 billion spend by Chevron to boost its overall production within the region. When fully operational, Jack St. Malo and Big Foot will produce around 230, 000 barrels per day, 33% of Chevron's targeted production increase.

Chevron is not alone in the Gulf of Mexico. Indeed, it is estimated that the number of rigs operating in the Gulf will nearly double from 35 now to 60 by the end of 2015. This doubling of rigs operating within the region is going to keep oil service companies busy as production facilities work flat out to keep up with demand.

Higher margins
Schlumberger (NYSE: SLB  ) is already starting to ride this incoming tidal wave of profits, reporting a strong fiscal third quarter as the overhang from the U.S. shale boom started to get worked off. According to Schlumberger, onshore shale drillers have become more efficient at drilling wells in recent years, which has led to more oil being produced for a lower cost -- bad news for Schlumberger, which profits from high-cost, specialized oil wells.

Deepwater drilling is much more lucrative for these companies, and thriving exploration and production in the Gulf of Mexico means that Schlumberger can make lots of cash from expensive drilling projects.

In particular, within SLB's fiscal third quarter results, the company's oilfield services drilling division reported the fastest growth, with revenue up nearly 10% quarter-on-quarter. Almost all of this growth came from the North American drilling market, the Gulf of Mexico in particular.

Drilling and spinning
One company that should really benefit from this rise in demand for oil services is National Oilwell Varco (NYSE: NOV  ) . Historically, National Oilwell Varco's sales have grown faster than the industry average as the company has acquired smaller peers for growth. Indeed, National Oilwell Varco recently released a blowout fiscal third quarter report that beat estimates on both revenue and EPS. The company's rig technology segment grew the fastest with revenue growing 12% year on year.

Furthermore, the company should be in for another year of rapid growth next year as a combination of company restructuring and high capex spending in the oil and gas industry takes hold. When I say restructuring, I mean the company's spinoff of its low margin distribution business early next year. During the fiscal third quarter, National Oilwell's distribution business had an operating margin of around 6%; meanwhile its rig technology segment had a operating margin of 21%, and the spinoff of the low-margin business should allow higher margins to flow through from the rapidly growing rig technology segment.

Foolish summary
The world's ever-increasing demand for oil means that more wells need to be drilled, and with oil becoming harder to find, wells are becoming more expensive to drill. This is great news for oil services companies, which should see their profits rise rapidly over the next few years as the demand for oil rigs in the Gulf of Mexico explodes and deepwater drilling becomes commonplace.

This could be the best play in oil services
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

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Related Tickers

9/30/2016 4:00 PM
CVX $102.92 Up +1.65 +1.63%
Chevron CAPS Rating: ****
NOV $36.74 Down -0.12 -0.33%
National Oilwell V… CAPS Rating: *****
SLB $78.64 Up +1.27 +1.64%
Schlumberger CAPS Rating: ****