by Aaron Levitt | June 6, 2014 10:12 am
Mother Nature can be cruel — especially if you’re an oil rig floating out in the deep waters of the Gulf of Mexico. Rigs already have to put up with the regular effects of the harsh environment all year long. And then, for a few months each year, the Gulf becomes a swirling torrent of potential destruction and millions of dollars’ worth of potential damage.
That’s right, it’s hurricane season.
The storms can be a huge cost sink for the E&P firms operating in the Gulf of Mexico’s waters. But it can also be a big profit generator for those oils service firms specializing in hurricane clean-up and restoration. And with hurricane season rolling in, now could be a perfect time for investors to snap up shares of these energy stocks.
There are more than 4,000 drilling platforms and nearly 56,000 kilometers of pipelines that dot the sea floor in the Gulf of Mexico. This vast floating and undersea network of infrastructure is vital for making sure the region continues pumping record amounts of crude. Unfortunately, being miles and miles away from the shoreline does pose a big problem when storms starting rolling in.
The combination of strong waves and high winds can lead to some serious damage to drilling rigs, floating platforms and other subsea infrastructure.
For example, mega storms Hurricane Katrina and Rita managed to completely destroy 109 oil platforms and five drilling rigs in the Gulf of Mexico when they hit back in 2005. That doesn’t included the 69 platforms that received extensive damage from the hurricane duo. The damage cost the energy industry some serious coin to repair and remove. Independent E&P firm Apache (APA) saw roughly $700 million worth costs related to damages from the two storms, while deepwater driller Transocean (RIG) witnessed around $170 million.
All in all, the damage from the two mega storms clocked in at a record $17 billion.
Now, since that time, we haven’t seen anything as big rock the Gulf, but damage does occur and even costs from a normal hurricane season can add up quickly. This season, The U.S. National Oceanic and Atmospheric Administration (NOAA) is predicting a normal hurricane pattern for the year. That should bring about 13 tropical storms and three to six full blown hurricanes. Of that number, one or two should reach major Category 3 status.
That normal pattern still packs a punch and could lead to some hefty profits for those energy stocks servicing the Gulf.
Which is why investors may want to consider adding several of the energy stocks in the oil service industry that provide solutions and reconstruction efforts in the face of hurricanes:
While Helix Energy Solutions (HLX) started out as a firm dedicated to subsea trenching and underwater pipeline construction, it has since branched out over the years into a full offshore services firm. That includes a hefty dose of well containment and repair work.
The key for HLX has been development of its Fast Response System (HFRS). The system allows for rapid cleanup of subsea oil spills and has been used in nearly 106 new drilling permits since 2011.
HFRS has been a big driver for earnings. For the first quarter of 2014, Helix managed to produce net income of $53.7 million, or 51 cents per share. This compares to just profits of 2 cents per share for the same period in 2013. Meanwhile, shares of HLX stock are still pretty cheap and currently trade for forward P/E of just 11.
When it comes torepairing an oil platform damaged by a major storm, much of the work is done under the sea. Unfortunately, with E&P firms drilling deeper and deeper, regular scuba divers can’t simply do the work. It takes specially designed remote-operated vehicles (ROVs).
And Oceaneering International (OII) has ROVs in spades — 304 in fact.
Investors have mainly focused on Oceaneering’s ROVS in the deepwater drilling space. Currently, around 70% of Oceaneering’s ROV profits come from this segment. Recent slowness in drilling rates have crimped margins across the sector. However, OII’s products are equally as important when it comes to repair work and well intervention. And unlike an ultra-deepwater drilling rig, moving ROVs around is quite inexpensive. That gives OII stock a major advantage. Investors will enjoy that advantage — along with the forward P/E of 15 on OII stock.
Moving all that equipment and personnel to an offshore drilling platform takes plenty of muscle, and no one does it better than Tidewater (TDW).
The firm basically created the offshore “work boat” industry back in 1956, when it launched the world’s first vessel tailor-made to support the offshore oil & gas industry. Today, Tidewater operates 294 support vessels, barges and ships. These vessels work in variety of support functions for the energy sector — including construction and restoration.
While profits have slipped recently — due to lower drilling activity — management expects demand to pick up during the spring and summer months. That forecast for sunnier skies at TDW doesn’t event include any potential hurricane clouds. Tidewater should get a boost if there’s any sort of real storm activity this year.
As investors wait, they can be treated to a new $200 million share buyback program and a 2% dividend. TDW currently trades for a forward P/E of just 9.
As of this writing, Aaron Levitt did not hold a position in the aforementioned securities. However, he may initiate a long position in OII within the next 72 hours.
Source URL: http://investorplace.com/2014/06/energy-stocks-hurricane-season-oii-tdw-hlx-rig-apa/
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