by Aaron Levitt | November 30, 2012 1:09 pm
It’s been a while, but new leasing activity in the Gulf of Mexico seems to be in full swing as the fallout of BP’s (NYSE:BP) Deepwater Horizon disaster may be finally ending. The latest U.S. Bureau of Ocean Energy Management (BOEM) auction for drilling rights in these critical waters was a dozy, and it highlighted an emerging trend in the exploration and production (E&P) world.
Deepwater is king.
The majority of the auction blocks were located in the western Gulf of Mexico and affirmed the oil and gas industry’s interest in moving into the region’s sub-salt layers and ever-deeper waters. That’s just another example of why investors need deepwater exposure in their portfolios.
Just a handful of companies competed for 116 tracts in the Gulf on Wednesday. Despite the low turnout, the BOEM’s auction was rousing success. Thirteen E&P firms pledged a high $157.8 million in bids for the rights to drill.
All in all, Washington has made roughly $2 billion in total lease sales in the Gulf over the last 12 months. Energy produced from the leases would be subject to an 18.75% royalty rate. Before this year, new leases were halted as sweeping safety measures and requirements following the Deepwater Horizon disaster in April 2010 were enacted.
Of the leases auctioned, just 11 of the blocks are located in less than 200 meters of water. The bulk are in depths of more than 1,600 meters. The western Gulf is generally considered less attractive than the central Gulf. However, interest in the region has picked up considerably as mammoth discoveries producing upwards of 200,000 barrels a day — like BP’s Thunder Horse and Shell’s (NYSE:RDS.A, RDS.B) Perdido fields — have been in western Gulf’s deepwater.
Yet, both Shell and BP where absent from the bidding.
BP had “independently” decided not to bid on the assets. Not that it would have mattered after the EPA recently banned it from new federal contracts due its “lack of business integrity” in the Deepwater Horizon disaster. Shell is currently the second-largest producer in the Gulf, behind BP, and presumably it didn’t need any more coverage in the region.
So who were the winners?
Major oil and gas producers Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) were the lead bidders, grabbing roughly 90 blocks, while broad natural resources firm BHP Billiton (NYSE:BHP) and integrated giant Exxon Mobil (NYSE:XOM) also made large winning bids. Most of the interest from these four firms was concentrated in the Gulf’s Keathley Canyon, where Shell’s Perdido rig is located.
Additionally, the four focused on the East Breaks area, where new seismic data is showing promise. Chevron won the rights to drill in the East Breaks with its bid of roughly $38 million. ConocoPhillips also was the highest bidder for four other East Breaks blocks.
What’s interesting about the bids is that all four of these firms have been increasingly focused on shale over the last few years. Exxon has made bold bids to acquire various shale resources, starting with its 2010 purchase of XTO. Earlier this year, it made a $2 billion drilling rights purchase from Denbury Resources (NYSE:DNR) and a $2.91 billion bid for Canada’s Celtic Exploration.
Likewise, BHP’s purchase of Petro Hawk and assets from Chesapeake Energy (NYSE:CHK) gave it plenty of shale and natural gas fields onshore. Conoco has been transforming itself into a U.S.-focused firm. And Chevron has bet big on exporting its bounty via liquefied natural gas (LNG).
The trouble is none of these onshore shale plays have really worked so far. Yes, they’re producing tons of gas, but that’s part of the problem. Lack of demand, supply gluts and warm weather have sent the price of natural gas downwards over the last year. That’s prompted many producers to cut back. BHP even went so far as to write down the value of its shale assets by $3.3 billion.
So, the shift toward deepwater could be a sign that many large producers are beginning to see the real long-term value in some of these offshore plays. After all, they offer a chance to add some serious production numbers once the wells are in place. All these companies can certainly use that added production.
While none is going to abandon fracking shale anytime soon, the fevered BOEM auction shows just how far producers are willing to go to gain access to the Gulf of Mexico’s riches.
Here at InvestorPlace, we’ve highlighted the opportunities in the sector from drillers like Noble (NYSE:NE) and Transocean (NYSE:RIG) to service providers like Cameron (NYSE:CAM). With new leasing activity resuming in the wake of the BP oil spill, the shift toward the Gulf’s deepwater is on — and investors should be prepared.
As of this writing, Aaron Levitt was long RDS.A and RDS.B.
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