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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Offshore Oil Stocks Flying As Investors Bet On A Deep Water Boom

  • Offshore drilling companies have seen their share prices jump this year as a result of renewed appetite for offshore drilling and exploration.
  • One notable trend in the ongoing offshore boom is a large increase in deepwater and ultra-deepwater drilling.
  • Ultra-deepwater production is set to continue growing at breakneck speed to account for half of all deepwater production by 2030.
Deepwater

Stocks of offshore oil and gas drillers and producers have gone on a tear after recent contracts broke records, reversing their seven-year downturn that reached its nadir during the Covid-19 pandemic. Rising global petroleum demand, coupled with increasing deepwater exploration and drilling, has been keeping offshore contractors really busy. 

Leading with impressive gains is deepwater drilling specialist, Transocean Ltd. (NYSE:RIG), whose stock has gained 99.1% in the year-to-date. RIG stock jumped nearly 10% over the past week after the company reported a three-year, $518 million contract to deploy one of its drillships in the Gulf of Mexico, the latest in a series of large transactions announced in recent months. The company has revealed that its aggregate incremental backlog associated with the latest contracts totals ~$1.2, bringing its total backlog to $9.2B. Meanwhile, rig rates have shot up to $480,000 a day, a 50%Y/Y increase and about triple the downturn’s lows.

Other offshore drilling stocks with robust gains are Diamond Offshore Drilling Inc. (NYSE:DO)+66.8% YTD; TechnipFMC Plc. (NYSE:FTI)+54.2%; Seadrill Ltd. (NYSE:SDRL)+53.8%; Noble Corporation Plc (NYSE:NE)+44.1%; Oceaneering International Inc. (NYSE:OII)+39.4% and Valaris Ltd. (NYSE:VAL). In contrast, the energy sector’s favorite benchmark, the Energy Select Sector SPDR Fund (XLE), has only managed a 1.6% return in the year-to-date while the broad market benchmark, S&P 500, has gained 19.4% over the timeframe.

Deepwater Boom

One notable trend in the ongoing offshore boom is a large increase in deepwater and ultra-deepwater drilling. Recently, the China National Petroleum Corporation (CNPC), the government-owned parent company of  PetroChina, and Cnooc (OTCPK: CEOHF), kicked off ultra-deepwater exploratory drilling for oil and gas as the country looks to wean itself of foreign oil. According to Chinese news agency Xinhua Global Service, CNPC will drill a test borehole of up to 11,000 meters (36,089 feet), the country’s deepest ever, which will help it better understand the Earth’s internal structure better, as well as to test underground drilling techniques. Related: Oil Prices Drop As Market Awaits Fed’s Interest Rate Decision

CNPC’s borehole depth is not far from Qatar’s world record of 12,289 meters (40,318 feet) for a petroleum well depth that was drilled in the Al Shaheen Oil Field in 2008 or Russia’s Kola Superdeep well that reached a depth of 12,262 meters (40,230 feet).

In the oil and gas exploration and production (E&P) industry, deepwater is defined as water depth greater than 1,000 feet while ultra-deepwater is defined as depths greater than 5,000 feet. 

But China is not the only country willing to drill to ridiculous depths in the pursuit of energy security.

Deepwater oil and gas production is set to increase by 60% by 2030, to contribute 8% of overall upstream production, according to a new report from Wood Mackenzie, as cited by Rig Zone. 

Ultra-deepwater production is set to continue growing at breakneck speed to account for half of all deepwater production by 2030.

Deepwater production remains the fastest-growing upstream oil and gas segment with production expected to hit 10.4 million boe/d in 2022 from just 300,000 barrels of oil equivalent per day (boe/d) in 1990. Wood Mackenzie has predicted that by the end of the decade, that figure will pass 17 million boe/d.

Norway's Aker BP (NYSE:BP) (OTCQX:AKRBF) is the latest oil major to make an ultra-deepwater discovery. At a total depth of 8,168 m, Aker BP says the well is the longest exploration well drilled in offshore Norway. The much bigger-than-expected oil discovery was made in the Yggdrasil area of the North Sea.

Preliminary estimates indicate a gross recoverable volume of 40 million-90 million barrels of oil equivalent (boe), much higher than the company’s earlier projection of between 18 million and 45 million boe. The discovery will significantly enhance the company’s resource base for the Yggdrasil development, which previously was estimated at 650M gross boe.The oil discovery is located within production licenses 873 and 442: In license 873, with Equinor ASA (NYSE:EQNR) and PGNiG Upstream Norway as partners. The plan for development and operations (PDO) for this project was submitted to Norwegian authorities in December 2022, with production scheduled to start in 2027.

Two years ago, U.S. oil and gas major Exxon Mobil (NYSE: XOM) made a big deepwater oil and gas find. Exxon announced that it had made two more discoveries at the Sailfin-1 and Yarrow-1 wells in the Stabroek block offshore Guyana, bringing discoveries on the block to more than 30 since 2015.  Exxon revealed that the Sailfin-1 well was drilled in 4,616 feet of water and encountered 312 feet of hydrocarbon-bearing sandstone, while the Yarrow-1 well was drilled in 3,560 feet of water and encountered 75 feet of hydrocarbon-bearing sandstone.

Exxon did not disclose how much crude oil or gas it estimates the new discoveries to contain, but hiked a previous output forecast for the third quarter from older discoveries in the region. 

The supermajor has boosted development and production offshore Guyana at a pace that "far exceeds the industry average”. Exxon’s two sanctioned offshore Guyana projects, Liza Phase 1 and Liza Phase 2, are now producing above design capacity and have already achieved an average of nearly 360K bbl/day of oil. The supermajor expects total production from Guyana to cross a million barrels per day by the end of this decade.

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Exxon said a third project, Payara, is expected to launch by year-end 2023 while a fourth project, Yellowtail, could kick off operations in 2025. 

Exxon is the operator of the Stabroek block where it holds a 45% interest while partners Hess Corp. (NYSE: HES) and Cnooc hold a 30% and 25% interest, respectively. Exxon’s oil and gas production are well below record levels, averaging 3.7M boe/day, nearly 9% below 4.1M boe/day set in 2016.

By Alex Kimani for Oilprice.com

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  • George Doolittle on July 27 2023 said:
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    Long $kmi Kinder Morgan Energy strong buy

    Long $IBM International Business Machines
    Strong buy

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    Short $xom strong sell. USA Auto demand and how retail markets to the pure BEV Big Spender continues to fundamentally alter the US demand picture for *ALL* downstream loss leaders.

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