Hardly missing a step, the gamechanger known as directional drilling is doing to offshore exploration what it’s done to shale formations onshore — and the payoff is likely to be huge for this drilling stock…
For more than a decade, oil and natural gas production in the shallow waters off the Gulf of Mexico have been steadily declining.
Government data indicates that oil production in waters less than 1,000 feet deep fell from 830,000 barrels per day in 1997 to 381,000 a decade later and continues to fall.
Much of that had to do with oil and gas assets being tapped out over time.
Then came the BP disaster, which was thought to have been the final nail in coffin for near-shore development given the public risks.
Fast forward a few short years, and there now appears to be a renaissance of sorts, thanks to directional drilling.
Over the past decade or so, horizontal/directional drilling combined with hydraulic fracturing has opened the floodgates for oil and gas production here in the US.
Much of the focus has been relegated to onshore shale regions, such as the Bakken and Marcellus, but the offshore market has also been experimenting with the technologies.
In recent times, companies exploring the Gulf waters have turned to directional drilling to revisit abandoned fields thought to have dried up from prior efforts.
And much like the success achieved in the shale formations inland, drillers have successfully tapped into fresh new oil and gas reserves through the latest drilling techniques.
Evidently, shallow waters offer plenty for investors to be bullish about.
In the most recent Rigzone Day Rate data, 861 out of 1,272 total offshore rigs are currently in operation, representing a 67.7% utilization rate.
Meanwhile, the use of shallower jack-up rigs have a utilization rate of 74.9%, with 400 out of 534 rigs in use at the present time.
Companies large and small are gradually making their way back to shallow waters to boost their reserves and production, and thus far it’s been incredibly fruitful.
Supermajor Chevron (NYSE:CVX) has been active in its shallow assets for a few years, having made a significant ultra-deep discovery in coastal Louisiana with 3P natural gas reserves equivalent to 547 bcf.
Privately held Fieldwood Energy acquired $3.75 billion worth of shallow water assets from Apache Corp (NYSE:APA) late last year.
Emerging player Energy XXI (NASDAQ:EXXI) recently completed a $2.3 billion deal to buyout EPS Oil & Gas. Its current horizontal drilling program is responsible for unlocking nearly 30 Mmboe of additional proved reserves — nearly double its previous amount.
All this renewed activity is expected to keep one rig-provider quite busy for the next few years.
Top Offshore Drilling Stock To Buy Today:
It may have taken quite a beating so far this year, but the long-term fundamentals for Hercules Offshore (NASDAQ:HERO) look intact.
The Company owns the largest shallow-water jack-up rig fleet in the Gulf, and has a presence in a number of offshore regions including the Middle East, West Africa, and Southeast Asia.
Major property transactions such as those mentioned above impacted HERO’s bottom line over the past year, as many of the companies involved were its customers.
Though this transitionary period disrupted their respective drilling programs, HERO sees the disruptions as temporary, with conditions likely to improve toward year-end.
“While I believe these transaction will be positive over the long run, in the near term they have led to a temporary lull in demand as the new owners review and re-prioritize their drilling plans once they assume control of the properties. This takes time and in some cases not all the personnel from the prior organization move over to the new owners,” says HERO President and CEO, John Rynd.
In the meantime, its Q2 2014 earnings report saw income from continuing operations of $6.6 million ($0.04 per diluted share) compared to income of $16.6 million ($0.10 per diluted share) in Q2 2013.
Despite the drop, revenues from Domestic Offshore for Q2 2014 increased by 10.5% to $140.4 million from $127.0 million in Q2 2013, driven by higher dayrates.
Average revenue per rig per day increased 28.4% to $108,237 in Q2 from $84,328 in the comparable 2013 period.
HERO’s backlog as of last week totaled approximately $1.2 billion in executed contracts, including a 5-year deal with Maersk for a newbuild jack-up rig in the North Sea.
Approximately $272.5 million of this backlog is expected to be realized during the remainder of 2014.
All this points to some real optimism towards the end of the year and beyond…possibly making it an ideal buy opportunity for Hercules right now.