XOM – 3 Stocks That Will Profit From Deepwater Drilling

by Traders Reserve | November 16, 2013 8:30 am

XOM – 3 Stocks That Will Profit From Deepwater Drilling

oil rig 150x150 XOM   3 Stocks That Will Profit From Deepwater DrillingCarl Icahn – and investors – this week won a big battle with Transocean (RIG[1]), the world leader in offshore and harsh environment drilling, when Transocean agreed to boost its dividend to $3 a share. Even more important, Transocean agreed to spin off an MLP in 2014 through an IPO, giving shareholders a double victory and another channel for income.

End of story, right? No, behind the news is a big takeaway for investors: there’s a big boom coming in offshore drilling . The prospects are enormous for the entire group of deep-water drillers and service companies.

The investment opportunities abound but the clues are in the behind-the-scenes machinations in places like Brazil, Mexico and Russia.

Profits ahead

Offshore drilling has been slowed by nationalism and national incompetence in these countries, but political pressures are pushing these recalcitrant nations into working to boost offshore oil production. The combined opportunity, offshore, from Brazil, Mexico and Russia is more than 100 billion barrels of oil. That means big profits ahead for off-shore drillers.

Investors should take note of these key developments:

The question for investors is how soon, how much for the drillers?

Offshore drilling in harsh environments begins slowly — you have to drill in an exploratory fashion before you begin to drill in earnest. That requires some work by companies such as RIG and SDRL. The approval in Mexico next year of foreign company involvement in enhanced oil recovery in existing fields is one short-term opportunity. That said, even the early stages of exploration and enhanced oil recovery will put pressure on offshore rig prices — and that is the real benefit for investors.

Growing demand for deepwater rigs

Here is how it typically works. A field is discovered and there is a go-ahead to drill, first to find the best sites and then to begin real production. As this filters back to capital spending, companies build offshore rigs — leasing them out and procuring commitment before they commit capital. This puts pressure on available resources, including capital, this pressure makes itself felt in prices and lease rates for rigs. Margins and profits expand.

Please note that the discussion here is for ultra-deep water (Brazil), deep water (Mexico) and harsh environment (Russia) drilling.

For investors who want a piece of this developing trend, Transocean and Seadrill are two of the bigger players in this arena. Other offshore drillers/rig operators are Noble (NE[4]) and Ensco (ESV[5]). Companies that provide services to offshore drillers and benefit from increases in exploration and drilling activity are Gulfmark Offshore (GLF[6]), Hornbeck (HOS[7]), Seacor (CKH[8]) and Tidewater (TDW[9]).

 Article author Michael Shulman does not own shares in any of the companies mentioned in this article.

 

Endnotes:
  1. RIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIG
  2. SDRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDRL
  3. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  4. NE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NE
  5. ESV: http://studio-5.financialcontent.com/investplace/quote?Symbol=ESV
  6. GLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLF
  7. HOS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HOS
  8. CKH: http://studio-5.financialcontent.com/investplace/quote?Symbol=CKH
  9. TDW: http://studio-5.financialcontent.com/investplace/quote?Symbol=TDW

Source URL: http://investorplace.com/2013/11/oil-stocks-to-buy-xom-exxon-esv-ne/
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