Get Ready for Drilling off the Atlantic Coast With McDermott

by Aaron Levitt | January 7, 2014 9:42 am

When it comes to drilling offshore in U.S. waters, there’s really only one game in town — the Gulf of Mexico. Home to the first offshore drilling rig, the Gulf has been a major source of our energy reserves for years and continues to churn out record production.

atlantic-drilling-MDR-stock[1]However, the Gulf’s status as the only U.S. hot spot for offshore drilling could be ending.

Pending seismic data as well as numerous pieces of legislation and lobbying working through Congress could reopen the Atlantic Ocean to offshore drilling. Closed since roughly the 1980s, the eastern shore of the nation could offer one of the biggest opportunities since we first tapped the Gulf or began fracking our shale.

For investors, drilling in the Atlantic isn’t a question of if, but when. Building out that opportunity will take plenty of infrastructure muscle. All in all, that leads us to one pretty beaten down construction stock — McDermott (MDR).

$23.5 Billion Economic Boost

First tapped in the 1940s, the Atlantic Ocean proved to be a dud. Of the few initial test wells drilled from 1947 to the mid 1980s, none were commercially viable, expect for a few near offshore New Jersey. Bowing to environmental protesters and years of disappointment, the leases eventually reverted back into the U.S. government’s hands — where they sat, unused.

Well, new advances in drilling technology and deeper reaching rigs could make the Atlantic the offshore haven du jour for U.S. energy firms.

According[2] to a 2012 survey by the US Bureau of Ocean Energy Management (BOEM) — the agency that regulates offshore drilling — the U.S. waters of the Atlantic could hold a plethora of oil and natural gas assets.

Overall, the BOEM estimates that the federal waterways off of our East coast could contain 3.3 billion barrels of oil and 31.28 trillion cubic feet (Tcf) of natural gas. That’s about 4% and 8% of the total amount of their respective recoverable energy resources in U.S. federal waters. Continuing advances in drilling technology could push that amount up to 5.6 billion barrels of oil.

While that total may seem on the smallish size — Saudi Arabia basically pumps out that amount of oil each year — the BOEM’s estimations don’t take into account the deepest parts of the Atlantic nor do they use the newest seismic testing results. In fact, the agency’s reports were constructed using data from more than ten years ago. New high-tech seismic scans won’t begin until later this year.

So the actual energy abundance that the Atlantic could bring in will be much much higher. Some analysts have pegged the number as high as double these early BOEM estimations.

And there’s a certainly incentive to grasp the opportunity.

The American Petroleum Institute predicts that if energy firms were allowed to tap the Atlantic, the U.S. would contribute $23.5 billion to the U.S. economy annually until 2035. Drilling in the Atlantic would also add about 280,000 new jobs. Given our stubbornly high unemployment rates and slow economic growth, that boost would certainly be welcome.

President Obama had planned on opening up the waterways back in 2010. However, BP’s (BP[3]) nasty spill put those plans on hiatus. Now the economic opportunity in the Atlantic has become too juicy to pass up, and many Southern and coastal state politicians have been stepping up their efforts to help include the ocean in the BOEM’s latest round of leases scheduled for 2017. Various lobbying efforts[4] should prove to be successful, given the President’s earlier support.

Tapping The Atlantic Opportunity

The potential offshore bounty that the Atlantic holds is just too rich for the U.S. to ignore. Drilling in the ocean will happen and it could be sooner than later, given the Congressional support and recent push to tap the waterway.

But how can investors get in on that action?

On the production front, Exxon (XOM[5]), Chevron (CVX[6]) and Marathon (MRO[7]) were all early adopters and some of the few that found success in Atlantic when it was open to drilling. Given the trio’s need to finding reliable and big reserves, they could be the first to jump at the chance to add leases in the region when they hit the auction block.

However, an even bigger play could be beaten-down and left-for-dead contractor McDermott International.

The problem for the Atlantic — like most of the nation’s energy reserves — is a lack of infrastructure. The seafloor of the Gulf of Mexico is littered with a vast pipeline and gathering system network that makes getting its production to the shore quick and easy. Unfortunately, because drilling in the Atlantic never caught hold, it doesn’t have luxuries like preexisting pipelines.

That infrastructure will cost billions to produce and will need to be in place before real drilling gets going — which is where MDR comes in.

The engineering and construction firm basically does nothing but design and build offshore energy infrastructure projects. From undersea pipelines and gathering systems to floating containment units, McDermott is a specialist. What’s more, the bulk of the Gulf of Mexico’s undersea logistics infrastructure was built by the firm over the past decades.

As the undersea specialist, there’s no reason to believe that MDR won’t get the nod again to help construct the Atlantic’s much needed pipelines. That could lead to positive earnings growth and some profits for MDR.

Meanwhile, MDR stock is sitting cheap.

As investors have gone gaga for shale and heavy construction firms like Chicago Bridge & Iron (CBI[8]) — which builds all sorts of liquefied natural gas (LNG) exporting and NGL cracking facilities — MDR shares have basically gone nowhere. However, add in the potential boost from pending Atlantic drilling, and the sub-$9 stock could surge back to its former glory days.

For investors, the energy potential of the Atlantic is great, but its infrastructure needs to be built before any real drilling takes place. Focus on MDR today, rather than the potential exploration firms.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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