The Gulf of Mexico is heating up again and the excitement is returning for deep water drilling. After three years of declining production from the Gulf, we are now poised to see a return of strong production growth, perhaps even eclipsing the growth of the much more hyped tight oil plays of the Bakken and Eagle Ford.
And that’s great for investors because the stocks most closely associated with deep water drilling in the Gulf of Mexico have been left mostly for dead since the Macondo disaster of 2010. As compared with the high-flying Bakken stocks, these are values that shouldn’t be overlooked.
And for premium readers of oilprice.com, I’ve got a few specific ideas on where to look for that value.
First, the Gulf of Mexico only contains a few key players, unlike shale oil plays. For the majors, Shell and BP still dominate the assets in deep water in the Gulf, with Chevron and Conoco making inroads, particularly after the latest massive deep water finds at Coronado and Shenandoah. And while Shell is too diverse to take advantage of by investors looking for Gulf-specific stocks, BP is not – they have sloughed off assets to pay for Macondo, but have retained much of their Gulf production, including their very juicy ‘Mad Dog’ deep water field off of Louisiana.
With the overhang of Macondo finally about to disappear for good or ill with the resolution of the civil suit ongoing in New Orleans, BP is finally poised to begin to make up the almost 40% of lost ground it has had to shoulder to the other majors since 2010. I was careful not to even mention BP for three years, but the time has come – at $42, BP is worthy now of a play.
Outside of the majors, Anadarko is by far the largest independent in the Gulf. It has been a core holding of mine, but has rallied quite smartly already in 2013 – if you don’t have a position in it yet, I’d look elsewhere for GoM ideas.
One place you can look is Cameron (CAM), which reported a small miss in earnings reported today and revised it’s guidance slightly downward. This might look bad, but the small break in price is a gift for investors looking to start a new position. Cameron is a servicer of blow-out preventers, and their backlog is now approaching $10B up from $8.6B at the start of the year – a sign of just how hot deep water is becoming again.
Another place to try is Seadrill, pounded recently and with a shaky dividend of over 9%. While I don’t believe that juicy divvy is necessarily safe, they have been slowly selling their shallow water fleet to concentrate on deep water. That strategy hasn’t helped in the short term, as their stock has indicated, but if the production in deep water remains on a strong trajectory, 2014 will be a banner year for them, with day rates for big rigs perhaps eclipsing the $1m mark.
The bottom line is that deep water drilling in the Gulf of Mexico has been an overlooked subsector in energy since 2010 – but there are a lot of reasons to believe that’s about to change big time, and for the long haul. Now’s the time to find some long-term value to buy.