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Why These Offshore Drillers Are Primed for Success

By Bob Ciura - Oct 22, 2013 at 7:42AM

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Oil is getting harder and harder to find, but huge investment in ultra-deepwater rigs means these offshore drillers won't disappoint investors.

The global energy mix becomes more complex by the day. The simple truth is that much of the world, especially under-developed economies, still requires vast amounts of fossil fuels to propel the engine of economic growth.

That means that the world's biggest offshore oil drillers have a tough task ahead of them, which is to find and procure enough oil to meet the ever-increasing global demand. As if that weren't challenging enough, the most substantial new oil discoveries are being made in hard-to-reach areas. Thankfully, there are offshore oil drillers that are more than up to the task, and investors would be wise to drill down on these great companies as candidates for investment.

Drilling down on ultra-deepwater
Oil is getting harder to find and procure, and the drillers most optimally positioned for this are the ones that will succeed. That's the mind-set currently employed by many of the global offshore drillers, including Transocean ( RIG -2.74% ), and it's the major contributing factor behind the company's shift in operational priorities. Going forward, Transocean intends to pursue a more focused and disciplined strategy, placing greater emphasis on what it deems 'high-specification' rigs.

In other words, Transocean appears willing to shed non-core assets to instead focus on rigs specifically designed for the toughest environments where oil is especially hard to reach. Specifically, the company's core asset portfolio going forward will be centered on harsh environments, high-specification jackups, and ultra-deepwater rigs.

Execution on this asset strategy will be the primary determinant of how successful Transocean will be going forward, but to this point, there's little that suggests the company can't meet its stated goals. In fact, industry research leads me to believe Transocean's strategy is spot-on. Of all new field resources discovered in 2012, 12 billion barrels of oil equivalent were discovered at depths of 5,000 feet or greater. This compares to slightly more than 6 billion barrels of oil equivalent discovered at depths between 1,300 and 5,000 feet, and just over 3 billion discovered at depths of less than 1,300 feet.

Moreover, Transocean believes that the ultra-deepwater business remains extremely favorable, as pricing has stayed strong and consistent. The company notes day rates for the high-specification assets it intends to pursue stand between $550,000 and $600,000 for ultra-deepwater. This same sentiment was echoed by fellow offshore driller Ensco ( VAL ), which has seen day rates of its own ultra-deepwater rigs rise by more than 50% in just the last two years. In addition, Ensco may be at an added advantage because it operates a very young ultra-deepwater fleet, maintaining an average age of just three years for its fleet.

On par with Ensco in that regard is Seadrill ( SDRL ), whose own fleet of ultra-deepwater rigs is also three years old on average. Seadrill, like its competitors, is investing heavily in rig technologies specifically designed for tough environments. Of Seadrill's future ultra-deepwater units, the company has several that can reach a maximum depth of up to 10,000 feet. These include the West Capricorn rig and the West Eminence rig, to be used in substantial discoveries in the United States and Brazil, respectively. These will be available between 2015 and 2017, and the company is very optimistic about the prospects of its ultra-deepwater rigs.

In prime position to profit
Transocean, Ensco, and Seadrill are each at the forefront of ultra-deepwater rig technologies and are increasingly focusing their efforts on extremely harsh environments where oil is very difficult to find and produce.

The investments they have each made in reorganizing their fleets to accommodate the world's seemingly unquenchable thirst for oil means they're in great position to keep rewarding shareholders. As a result, Transocean, Ensco, and Seadrill appear to be optimally positioned and should be on your watch list.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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