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Gulf of Mexico is Back, and Subsalt is all the Rage

In late March, the US Department of Interior released the results of its Central Gulf of Mexico lease sale 227. It was a great auction, with a LOT of interest—52 companies, 407 bids and 320 tracts up for offer--and heavy bidding competition. This is only a fraction of the blocks up for grabs (4.5%), so there’s a lot more to come.

This is the rebound from the 2010 oil spill, which saw a major slump in bidding. This time around, minimum bids for deep-water acres were around $100 per acre, compared to 2012 when the minimum per acre was only about $37. Then, companies bought acreage, but failed to do anything with it. Now, with the minimum bid raised, and more time allowed on the lease if operators drill wells, there should be more activity.  (In November 2012, when the DOI offered over 20 million acres in the western Gulf, it generated only $233 million in bids on 3% of the land offered.)

Offshore Gulf of Mexico

These sub-salt plays were temporarily sidelined by the shale revolution onshore, but now what we are about to see—in part spurred by sub-salt and pre-salt success in Brazil--is the true development of sub-salt plays in the Gulf of Mexico. Analysts believe we could see $70 billion spent on exploration here by 2030, making it THE most active deep-water play in the world—more active than all of them combined. 

The details of the lease sale are telling, especially in terms of the number of bids for deep and shallow-water acreage.  There were 131 bids for acreage in depths of 1,600 meters or deeper, and 85 bids for acreages at depths of 200 meters or less. This unexpected interest in the shallow depths is indicative of a potential revival of this Gulf of Mexico area that had largely been abandoned.

Let’s recall the Gulf of Mexico potential here:

•    11.5 trillion cubic feet of proven gas resources
•    1.4 billion barrels of proven crude reserves
•    New fields coming online
•    New discoveries announced at an impressive pace
•    Resumption of lease sales
•    Deep-water development picking up
•    Chevron has set a fast pace for developing its Gulf of Mexico plays: Jack/St. Malo, Big Foot and Tubular Bells fields, with production expected to start in 2014 and total estimates of 500 million bbls of potentially recoverable oil
•    Deep-water drilling focus on the Miocene and Lower Tertiary structures
•    Lower Tertiary play sits beneath a thick wedge of salt that is about 70 miles wide and 200 miles long and could contain about 31 billion bbls of oil and 134 trillion cubic feet of gas undiscovered, and technically recoverable
•    Total recently made a significant discovery at its North Platte prospect in the Garden Banks block, estimating several hundred million barrels of oil

Majors aside, this is who we like in the Gulf of Mexico “revival”:

Noble Energy Inc: This company is a hit any way you look at it, riding high on its Israeli endeavors and the launch of gas production at is Israeli Tamar field in the Levant Basin. In November, all attention was on the company’s Gulf of Mexico holdings, when it discovered 150 feet of net play in two Miocene reservoirs in the Big Bend prospect. This prospect is in 7,200 feet of water in the Mississippi Canyon Block area. This will be a major boost to Noble’s cash flow.

Venari Resources: This subsalt-focused company has recently expanded its Gulf of Mexico portfolio with an $86.8 million 15 deep-water block set in the Central Gulf of Mexico offshore lease sell held in mid-March. This includes the most sought-after Walker Ridge Block 187, for which there was some heavy bidding competition. Venari came out on top with $45.5 million. This is a major boost to Dallas-based Venari, which was already riding high on new discoveries at Shenandoah and Coronado (both in the Walker Ridge area, where other major discoveries have been made recently, with Chevron, Anadarko and ConocoPhillips). In May last year, it also got a nice cash infusion with a $1.125 billion capital commitment from two global investment firms: Warburg Pincus Kelso & Company and The Jordan Company. It’s got cash for significant exploration and development.

McMoRan Exploration Co.: Here we’re looking at ultra-deep “onshore” and in the Gulf’s shallow waters. McMoRan is targeting similarities in these prospects to the Gulf’s deep-water subsalt plays. The company has invested close to $1 billion in its Davy Jones prospect, and has submitted development plans for its Blackbeard East field. At its ultra-deep Blackbeard West-2 well in the Ship Shoal Block 188, McMoRan says there are three hydrocarbon-bearing sands in the Miocene formation.

Here’s another one, but consider this a combination alert-opportunity: Swift Energy Inc (SFY).

Swift is looking at a potential sub-salt discovery in its Lake Washington field in the US Gulf of Mexico off the shoreline of Louisiana where it is eyeing what it thinks is up to 350 million barrels of oil equivalent.

So, for anyone willing to take the risk, Swift is shopping for a partner with major deep-water drilling experience. In preparation for this, Swift will seek to announce a joint venture before the end of this year and is willing to give up as much as two-thirds of its ownership to develop the Lake Washington potential.

This sub-salt potential isn’t a wild guess. In 1990, Amoco took samples of a well drilled through the salt layer in Lake Washington, and Swift has recently delved into those samples with more scrutiny.

Let’s not downplay the risk, though. Swift doesn’t have the capacity to go it alone and has no intention of trying without a strong partner. It seems confident one will surface, though, and is already eyeing next year for the drilling of the first sub-salt exploration well, which could cost about $25 million, or more.

BUT stay away from Swift, for now, but keep an eye on anyone else who jumps in on this joint venture prospect.

Swift has had its ups and down recently.

On 17 April, Swift saw its stock rise 2.87% and close at $14.0 on a traded volume of 1.21 million shares, with the 52-week range $12.25 and $30.85.The company has a price/sales ratio of 1.06 and a price/book ratio of 0.56. The 50-Day Moving Average was $14.60 and the 200-Day Moving Average was $15.72.

On 18 April, Swift shares dropped 9% to $12.74.

On 15 April, an investigation on behalf of investors in shares of Swift was announced concerning whether certain Swift Energy officers and directors possibly breached their fiduciary duties in connection with certain statements. Specifically, the investigation will determine whether Swift officers caused damage to the company and its shareholders by failing to implement adequate internal controls, among other things. At the heart of the matter is the fact that Swift’s total revenue decline from$599.13 million in 2011 to $557.29 million in 2012 and its respective net Income decreased from $98.82 million to $20.94 million.

Shares of Swift also declined from as high as $46.27 in February 2011 to as low as $13.18 in February 2013.

Simply put, Swift is a small-cap stock with very high volatility, and while we like the idea of “onshore” subsalt potential in the Gulf of Mexico, and indeed under Lake Washington, we would wait and see how this one pans out before jumping in.

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