Deepwater Drilling Has a Bright Future

The oil business used to be dominated by oil fields found in the Middle East, Texas, and other locations where the material could be easily extracted. But today's oil industry is increasingly looking to shale deposits and offshore drilling for new reserves. Shale drilling may be getting the headlines now, but it's under more than a mile of water where I see huge opportunities in the energy industry.

New reserves offshore
Most of the easy onshore oil has been exploited, which is why the oil industry is searching for oil in deeper water. Economically, this wouldn't have been feasible a decade ago, but with oil hovering near $100 per barrel new drilling methods have become profitable. The newest economical drilling location is in ultra-deepwater, which is considered wells drilled in at least 5,000 feet of water.

These ultra-deepwater fields are still relatively new to the oil industry and that means lots of new discoveries. Below is a slide from a recent Seadrill (NYSE: SDRL  ) presentation that shows ultra-deepwater and deepwater drilling are the only areas where new discoveries are replacing annual depletions.

Source: Seadrill Q3 results presentation with data from Rystad Energy, UCube.  

It's put another way in a Transocean (NYSE: RIG  ) presentation, with data from Wood Mackenzie, which shows that more than 12 billion barrels of oil equivalent were discovered in more than 5,000 feet of water last year, almost as much as all other areas of the world combined.

Source: Transocean Investors Day presentation with data from Wood Mackenzie.  

If most of the new oil and natural gas discoveries around the world are being made in ultra-deepwater it would make sense that demand for ultra-deepwater drilling rigs are at a premium. That's exactly what we're seeing right now.

The explosion of ultra-deepwater drilling demand
Ultra-deepwater drilling has acted like a reinforcing loop for the industry. The more drilling takes place the more oil is found, which leads to more drilling and more oil discoveries. That's resulted in extremely high rates for ultra-deepwater rigs, as well as growing demand.

Transocean predicts that the global offshore floater fleet will have to increase from 298 units this year to 500 long term. With 160 floaters over 30 years old there's potential for 215 new rigs beyond what's already in the pipeline.

Transocean is taking advantage of this market with 27 ultra-deepwater rigs and another seven under construction. It also has 12 deepwater rigs. Management expects dayrates to remain between $550,00 and $600,00 for newer rigs.

Seadrill has 16 ultra-deepwater rigs, with another eight drillships and four semisubmersibles under construction. This is the most leveraged play on ultra-deepwater drilling and has an incredibly high 8% dividend yield.

Ensco (NYSE: ESV  ) is another big player, with 29 floaters accounting for 64% of the company's revenue. Another three drillships are under construction, which will add to the fleet. 

The final company to look at in offshore drilling is Noble (NYSE: NE  ) , which has 14 drillships and three under construction. It has an older fleet than Seadrill or Ensco, at an average of 9.5 years, but Noble will grow as demand for ultra-deepwater rigs increases. 

I think these are the four companies with the best exposure to deepwater drilling and often use each other as a basis for comparison. 

Deep opportunities
Oil discoveries that are moving further offshore provide a great opportunity for investors buying ultra-deepwater drilling rig owners. Of the list above, I think Transocean and Seadrill present the best opportunities because of their weighted exposure toward this market. That said, Noble and Ensco provide a more diverse approach to drilling for investors who don't want to take the risk on a leveraged ultra-deepwater play.

Long term, I think the entire group will outperform the market and provide great dividend opportunities for investors. This is a top area to invest in energy. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2013, at 11:06 AM, abner wrote:

    Scribe Hoium, good piece with which one can hardly disagree. Wonder if you have delved into PACD, Pacific Drilling? Seems like a tightly focused state of the art player. High quality management projecting a conservative trajectory.

  • Report this Comment On December 17, 2013, at 12:58 PM, spokanimal wrote:

    I would add that the 160 floaters that are over 30 years old are also not "ultra-deepwater", in that they are 2nd and 3rd generation units.

    They are thus mid-water and deep water floaters and mostly restricted to depths under 2,500 to a maximum of 5,000 feet of water.

    Transocean still has a number of mid-water floaters, which have actually been gaining favor in the recent, intense competition for the ultra-deeps in areas where they can be used. In fact, the dayrates for midwater floaters have spiked to 15 year highs this fall, and may well be contributing to the fact that there are over 7 dozen deep and ultra-deep water floaters that remained unsigned for 2014 as of December 1st.

    For their part, Transocean has trimmed it's stacked rigs to 8... 5 of which I believe were mid-water units, and that's a good number relative to where they were with the mid-water units a few years ago (they sold off all of their older jackups for around 750 to 800 million ~ a year ago).

    Your premise if pretty good, Mr. Hoium, but needs to be fine-tuned for near-term industry metrics and outliers such as Brazil's push to supply more locally owned floaters for it's pre-salt projects being conducted by petrobras, to name just one.

    Spokanimal

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