The Gulf of Mexico is just four years removed from one of the worst oil spills in history. At the time, if someone told you that oil production in the Gulf would be back in full swing by 2014, you might have thought they were crazy. That would be especially so if one of the companies back in business in the Gulf is BP (NYSE:BP), the operator of the rig that exploded in 2010.
However, the truth is that not only is production ramping up once again in the Gulf, but BP is playing a big role once again. This is a significant development, because the Gulf is one of the highest-producing areas in North America.
The U.S. government recently held a major lease sale for drilling contracts in the Gulf of Mexico. In a surprise twist, BP was heavily involved, just days after reaching an agreement with the U.S. to lift its suspension from making bids on Gulf contracts. BP, along with another company that may surprise you, are making big bets on Gulf oil.
BP is back with a bang
Just a few days ago, BP reached a settlement with the Environmental Protection Agency to allow the company to resume bidding on new Gulf contracts. BP wasted no time, making $53 million in bids to secure 31 tracts.
The Gulf of Mexico is a major focus for oil and gas companies like BP, and for good reason. According to the U.S. Energy Information Agency, Gulf of Mexico federal offshore oil production represents 23% of total U.S. crude oil production.
Not surprisingly, BP desperately wants to get back into the Gulf, and it's on its way. In all, BP operates 10 drilling rigs in the deep-water Gulf of Mexico. In its most recent quarterly results presentation, BP specifically attributed ongoing success in Gulf production as a major reason for why it was able to increase fourth-quarter production by nearly 4%.
Another surprising entrant emerges
Not only is it a surprise to see BP back in business in the Gulf, but it was surprising to see that Freeport McMoRan (NYSE:FCX) was active in the oil lease sale as well. That's because Freeport McMoRan has a relatively new energy business, but it's clear that its energy business is rapidly emerging. Freeport McMoRan's energy subsidiary, Freeport McMoRan Oil & Gas, was the highest bidder for federal oil contracts. It made 16 separate bids for a grand total of $321 million, including the sale's single biggest bid of nearly $70 million.
Freeport McMoRan's winning bids were concentrated mostly on what it calls high-impact, drillable targets, with the goal of adding several new exploration plays to its portfolio. Freeport has an emerging oil and gas business, and its recently secured contracts will complement its existing production profile.
Since its oil and gas production first started up over the final seven months of 2013, Freeport produced 38 million barrels of oil equivalents. In 2014, it's planning to produce nearly 61 million barrels of oil equivalents, and its winning bids for Gulf contracts will support its efforts.
When Freeport McMoRan first started building out its energy business, it stated its intention to derive a quarter of its cash flow from oil and gas. Its oil and gas segment produced $1.8 billion in operating cash flow in just seven months of operation last year. Considering Freeport as a whole generated $6.1 billion in cash flow all of last year, it's clear that it's well on its way to reaching its goal.
The Foolish bottom line
BP is just in the beginning stages of getting back to business in the Gulf of Mexico, and Freeport McMoRan is a relatively new entrant into oil and gas production in general. However, both companies secured several contracts in the most recent round of Gulf of Mexico sales. Each company has a clear desire to boost oil and gas production, and considering how much production potential the Gulf holds, is making a wise strategic decision to secure dozens of Gulf contracts.
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