3 Picks to Play ‘The Year Of Subsea’

As unconventional resources and horizontal drilling sweep across North America, the companies supplying the necessary equipment will continue to see a big boost in their bottom lines.

However, it’s not just the frackers that will enjoy great gains.

See, we have also been drilling deeper into the ocean’s depths to extract crude oil and natural gas. As a result, subsea equipment makers will soon be kings in their own right. While deepwater “trees,” high pressure wellheads and umbilical pipeline connectors aren’t the sexiest products in the world, they could be the key to energy riches over the next few years.

For investors, concentrating on these equipment makers could be the play of the year.

“The Year of Subsea”

As E&P firms search for energy in even deeper water, the technical challenges of getting that oil out of the ground and up to the surface are getting harder to deal with. That’s driving record spending by energy producers on subsea and deepwater equipment.

At their core, subsea production systems are wells located on the seafloor rather than the surface. The hydrocarbons are extracted at the seafloor and then are “tied back” to an already existing production platform. The well is initially drilled by a movable rig — such as semi-submersible drilling rig or drillship — and the then extracted oil and gas is transported by a riser or undersea pipeline to a nearby production platform.

Subsea systems are typically used at depths of 7,000 feet or more and currently do not have the ability to drill — only to extract and transport petroleum.

The real advantage of subsea production systems is that they allow E&P firms to use one production platform to service many undersea wells. As companies drill deeper and the cost of offshore production rises, using a subsea gather system could represent significant savings and mean the difference between a project being profitable or not.

Given the potential cost savings — a 1% improvement in the oil recovery factor could translate into $3.2 billion in the value for some deepwater projects — it’s no wonder that offshore explorers have begun purchasing subsea equipment in spades.

Last year, E&P firms spent roughly $8.4 billion on this equipment, and 2013’s estimated numbers is set to shatter even that huge amount. According to industry research consultant Quest Offshore Resources, spending on subsea valves, pipelines and cables that will help build these underwater oilfields will grow to a record $13.9 billion this year — roughly a 66% jump over last year’s numbers.

Overall, analysts predict that subsea production could rival traditional offshore production in less than 15 to 20 years … and that the market for these devices is set to grow to a staggering $130 billion by 2020. This torrid growth has prompted Wells Fargo analysts to dub 2013 as the “Year of Subsea” — citing that this is merely the first inning of a long ballgame.

Given the growth trajectories for subsea equipment, energy investors should seriously take a look the service firms in the sector. With that in mind, here are three top picks.

How to Play It

FMC Technologies: When it come subsea equipment, FMC Technologies (NYSE:FTI) is synonymous with “Christmas trees” — devices that monitor and control the production of a subsea well. To put it simply, FMC sells a lot of them.

The company had orders for 159 subsea trees last year. However, this year is on track to eclipse that amount. Recent big orders have come in from BP (NYSE:BP) and Statoil (NYSE:STO), while the company also has a five-year deal with Tullow Oil for its mammoth Jubilee field in offshore Ghana. All in all, FMC’s backlog now stands at more than $5 billion.

Analysts predict that FMC’s revenue for subsea services will reach $2.5 billion in 2016 and more than double within the next five years. FMC shares have gained about 23% so far this year, but are still cheap on a long term basis.

Cameron International Corporation: While it makes products for onshore drilling as well, Cameron’s (NYSE:CAM) transformation into a deepwater equipment provider along with its subsea partnership with Schlumberger (NYSE:SLB) continues to pay benefits. The latest? A $600 million contract with Brazil’s Petrobras (NYSE:PBR) to supply 47 subsea trees and associated equipment for use in the nation’s Pre-Salt and Post-Salt areas offshore.

Like FMC, Cameron’s backlog for subsea products continues to surge and reached a record $8.6 billion at the end of 2012. More importantly, that backlog and continued subsea sales have resulted in a 66% leap in cash flows.

General Electric: I know throwing GE (NYSE:GE) in here may be confusing to some readers, but the industrial giant has quickly made a name for itself in the oil and gas arena — specifically in the subsea space. The firm had orders for more than 125 trees last year and continues to rack up new contracts for its energy offerings both onshore and off.

While it isn’t a pure energy services play, GE’s global dominance will serve it well in acquiring new business for its oil and gas division. I wouldn’t be surprised if the elder statesman of the industrial industry makes some big acquisitions moves to further its position and continues to eat away market share of other players.

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

Article printed from InvestorPlace Media, https://investorplace.com/2013/03/3-picks-to-play-the-year-of-subsea/.

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