In the markets, it's good to have something that's in great demand, particularly when supply is limited. That could prove to be great news for shallow-water drilling company TODCO (NYSE:THE).

In the past, I've written about deepwater drillers Transocean (NYSE:RIG) and Diamond Offshore (NYSE:DO). They're in a complex business, the supply of drilling rigs is tight, and some of the most promising new oil fields are located in deep water. Moreover, deepwater drilling requires semi-submersible rigs, which take three to four years to build and cost up to $600 million. The construction lead time and cost keeps supply constrained, and dayrates -- the price to rent a semi-submersible rig and crew for a day -- are rising at a rapid clip.

While I still believe the deepwater companies have a great future, I missed a huge investment opportunity closer to shore in the shallow waters off the Gulf of Mexico: TODCO. The company owns and operates 64 rigs, with 48 of them in and around the Gulf of Mexico. These rigs are mostly of the jack-up and inland barge variety; while they're less expensive to construct than deepwater semi-submersible rigs, they can still cost more than $150 million. Sixteen of TODCO's rigs are cold-stacked (i.e., idle), and TODCO is the only company with any significant excess capacity in the Gulf. With oil and gas prices near record highs, these idle rigs are heading into service.

TODCO was formed in 2004, when Transocean decided to spin off its "shallow water" (i.e., 1000 feet or less) assets in an IPO so that it could focus on deepwater drilling. Transocean sold its final block of TODCO shares last May. If shallow water was such a great business, I asked myself, why would Transocean sell? Historically, shallow-water drilling was considered a commodity business, because supply outstripped demand -- thus explaining why TODCO had cold-stacked rigs. Profits were low, and rigs began to leave the Gulf for other areas, like Indonesia, where dayrates were higher. The supply of rigs shrunk until there was a shortage. Last year, dayrates in the Gulf started a rapid climb to approach the other parts of the world.

The shortage in the Gulf has placed TODCO in an enviable position with its cold-stacked rigs. Back in November, fellow Fool Stephen Simpson wrote about how the cold-stacked rigs are TODCO's ace in the hole. Since early 2005, TODCO's average dayrate has increased more than 60%, from the high $30,000s to the mid $60,000s. In the past year, seven cold-stacked rigs were put into service. This year, TODCO expects most if not all of its remaining 16 cold-stacked rigs to follow them -- but the company will only reactivate a rig if a lessee signs a term contract that pays for the reactivation. It takes TODCO only three to four months to reactivate a cold-stacked jack-up rig, compared to two to three years to build a new one. Therefore, given the high demand for rigs, TODCO's expectation that it will be able to reactivate its remaining cold-stacked rigs seems reasonable.

In 2005, TODCO's shares more than doubled in price, resulting in a current price-to-earnings (P/E) ratio of 66. Before you scream that the shares are overvalued, note that the consensus estimate for 2006 is $3.67 per share, providing a forward P/E multiple of only 12.3. I don't like to use analyst earnings estimates to value energy production companies, because such companies trade on proven reserves and annual production, not earnings. In the energy drilling business, however, earnings metrics do make sense. Dayrates and utilization rates are directly related to driller earnings and are very visible to analysts.

In addition to a low forward P/E valuation, TODCO sports a strong balance sheet. The company has $75 million in cash, which constitutes more than four times its long-term debt, and has been free-cash-flow positive since 2003. The main risk in the drilling industry would be a collapse in the price of natural gas, but as I've written many times before, I doubt energy prices will decline anytime soon. For investors seeking a "pick and shovel" play within the booming energy markets, TODCO's shares are worth a look, even at today's relatively high prices.

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Fool contributor Robert Aronen owns shares of Transocean and Diamond Offshore. The Motley Fool has an ironclad disclosure policy.