Noble (NYSE:NE) announced this week that it would separate its business into two highly focused offshore drilling companies. A newly formed company would focus on driving growth from its legacy standard specification assets. Meanwhile, Noble itself would continue to own the high-specification assets so that it could focus on deepwater and harsh environments. It's a move that makes a lot of sense because the focus of oil drilling in the future will be on these more complex projects. Of the two proposed businesses, the assets Noble will keep are the ones that I think are most appealing.
Capital is flooding to the deepwater drilling market
According to Wood Mackenzie, drilling activity and spending in the deepwater is expected to increase significantly over the next decade. It sees the market growing from $43 billion in 2012 to $114 billion by 2022. To meet this demand the industry is estimated to require an additional 95 deepwater rigs, which would cost $65 billion to build. It's that growth Noble is seeking to capture through this separation.
Oil companies aren't venturing into the deep for fun. Last year just happened to be the best year ever for deepwater discoveries at 52. While this year's numbers are down to just 19, the only places left in the world to find needle moving oil discoveries is to drill in deepwater locations.
From building scale to nimble growth
In order to meet this growth the offshore drilling industry has had to undergo quite the transition over the past few years. Gone are the days where building scale with large transformation deals like Transocean's (NYSE:RIG) acquisition of GlobalSantaFe are what rules the sea. Instead, drillers are refocusing in an effort to be more nimble to capture growth. Even Transocean has paired back its fleet, selling 38 standard jackups to Shelf Drilling and divesting an additional 20 non-core rigs over the past couple years.
Another example of this transition is Seadrill (NYSE:SDRL). While it has been investing heavily to add new ultra-deepwater vessels to its fleet, the offshore driller has also been shedding assets like its tender rig fleet and placing lower-growth assets into its MLP Seadrill Partners (NYSE:SDLP). The company's core fleet is now built around its 28 ultra-deepwater units, 28 high-specification jackup rigs, and three harsh environment jackups. That's the type of high-specification, deepwater focused fleet that Noble is looking to create with its proposed spinoff.
Noble's choice to slim down and refocus its efforts on the deepwater should pay off over the long term. Gone are the days where scale mattered; today the best opportunities are found by being nimble and focusing on extracting oil from the most hard-to-reach places. That is why as long as oil prices stay high there will be a tremendous incentive for oil companies to search for oil, with the deepwater offering the best opportunity for a big discovery.
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Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.