Ultra deepwater drilling is booming. Here are three of the best stocks to buy if you want to play it profitably…
When people think of the Golden Triangle, visions of an exotic, underground drug-trade in south Asia often spring to mind. But in the petroleum industry, the deepwater Golden Triangle represents a different region of the world entirely.
This triangle is comprised of three sub-surface basins: the Gulf of Mexico, Brazil, and West Africa. And while it’s been long known these basins are oil and gas hot zones, only in the past 10-15 years have energy companies started to aggressively tap their deepwater riches.
You see, much of the easily accessible offshore plays around the globe have been identified and drilled out. Companies now have to scour the waters for giant oil fields buried 25,000+ feet below the surface. But boy can it be worth it…
When a discovery is made, it carries with it the possibility of billion-dollar profits. That’s why I’m bringing you some of best deepwater stocks to buy today – because I think we have a chance to profit big in the years to come.
In fact, there’s so much production potential in this region, that producers from all corners of the globe have descended to stake their claims – and they didn’t just come with their check books. They’ve brought their drills… lots of them.
Currently, the Golden Triangle is home to over 30% of the world’s offshore rigs.
By comparison, the prolific North Sea region only has 12% of the global rig count.
In the Gulf of Mexico especially, we are seeing a growing number of deepwater rigs preparing for exploration. Currently, 37 deepwater rigs operated by 14 different companies by are in the Gulf.
According to Rigzone, that number is expected to climb to 60 by 2015 with the new rigs valued at a whopping $16 billion to build – not exactly chump change.
But with the opportunity to extract millions of barrels at $100 a barrel, the payoff is too lucrative to ignore for companies like Shell and Anadarko.
In one of its latest projects, Shell announced it is constructing an offshore facility 200 miles southwest of New Orleans that will produce 50,000 boed from more than 250 million boe of recoverable resources.
Likewise, after a recent upgrade at its Jubilee oilfield operations in Ghana, Anadarko expects to raise its daily oil output by an additional 10,000 barrels to 120,000 bpd by the third quarter of 2013.
And it’s not just the Gulf of Mexico and Africa seeing spikes in activity lately. Brazil’s offshore development has been on fire as well. It’s estimated the country could contain as much as 100 billion barrels of oil equivalent (a hugewin for Petrobras, the state-owned producer that’s required by law to own a 30% equity in every well that’s drilled off Brazil’s shores).
Having said that, where should investors park their money?
Well, there are really two ways to play the deepwater drilling game.
One, buy up the majors like Shell (RDS:NYSE) or Anadarko (APC:NYSE). But remember, finding gushing wells offshore are never a sure thing. And seeing that the construction of deepwater rigs can run in the hundreds of millions of dollars - there is huge financial risk at stake if they come up empty-handed.
That’s why a safer bet would be to invest in the drilling contractors – rather than the producers themselves.
Barring another major oil spill, rig contractors are going to be very busy for the next few years – meaning these are gonna be the some of the best stocks to own as offshore development in the Golden Triangle continues to grow.
Best Stocks to Buy Now:
Here are a few of the best stocks to buy to take advantage of then deepwater drillout.
London-based drilling contractor Ensco Plc (NYSE:ESV) recently won drilling contracts in the Gulf as well as offshore Angola where they’re each expected to pull in day rates of between $430,000 and $530,000 over the coming year.
Drilling giant Seadrill Ltd. (NYSE:SDRL) has six new ultra-deepwater drillships earmarked for the Golden Triangle to be delivered between H2 2015 and H1 2016. Each unit is estimated to cost just under $600 million to build and will command hundreds of thousands of dollars per day.
And last fall, Transocean Ltd. (NYSE:RIG) was awarded contracts by Royal Dutch Shell to build four ultra-deepwater drillships worth a total of $3 billion. With Shell pursuing new deepwater projects in the Gulf and Brazil, there’s a good chance the rigs are headed for either basin.
For Transocean, its one Achilles’ heel (and it’s a large one) of course is the Deepwater Horizon disaster, which continues to cast a dark cloud over the company.
However, with a market cap of over $17 billion, they’ve remained the second largest contractor behind Seadrill despite its legal issues.
Trading at roughly 17-times trailing earnings and still issuing a 4.6% dividend to shareholders, Transocean has some real room for growth – especially since the company could earn over $6 per share in 2014.
Should the company find success in the Golden Triangle in the next year, its rebound could be explosive.