The Gulf of Mexico has long been the favorite offshore drilling spot for energy firms. Across the Gulf’s shallow and deep water, energy companies continue to find and produce record amounts of crude oil and natural gas.
However, the Gulf’s status as the only U.S. hot spot for offshore drilling could be ending. That’s because the Obama administration just released a proposal to open up federal waters in the Atlantic Ocean.
Closed since the 1980s, new seismic data and a fresh bit of lobbying could reopen the closed Atlantic to new offshore drilling. For investors, the eastern shore of the nation could offer one of the biggest opportunities since drillers first tapped the Gulf or began fracking our shale.
Atlantic drilling is coming and your portfolio should be prepared.
$195 Billion In New Investment
Every five years, the Department of the Interior — via a series of Presidential actions — decides which blocks of Federal land to lease for natural resource exploration. Back in 2010, the Obama administration’s plan was basically not to open up new land– thanks in part to the Deepwater Horizon disaster courtesy of BP Plc (ADR) (NYSE:BP).
This year’s proposal, unveiled at end of January, includes the usual suspects — 10 new blocks of offshore land in the Gulf of Mexico and three off the coast of Alaska. However, it also contains one new interesting territory for investors and energy firms alike — a huge block running along the mid- and south-Atlantic states. The Interior Department proposal includes auctioning off areas located roughly 50 miles off the coasts of Virginia, Georgia and the Carolinas to oil companies around 2021.
Five years in the making, Atlantic drilling may finally be back in the U.S. energy mix.
Originally prospected in the 1940s, the Atlantic Ocean proved to be pretty much a dud. Test wells drilled until the mid-1980’s showed a lack of commercial viability. After environmentalists protested the leases in the Atlantic reverted back to the U.S. government and sat vacant. But by using today’s deep water drilling technology, the Atlantic may prove fruitful after all.
The last study conducted back in 2013 by the Bureau of Ocean Energy Management (BOEM) estimates that the region contains around 3.3 billion barrels of oil and over 31 trillion cubic feet of natural gas. Advances in drilling technology could push that amount up to 5.6 billion barrels of oil. Including the very deepest sections of the Atlantic Ocean will push that amount upwards even further. The American Petroleum Institute (API) predicts that Atlantic drilling could attract $195 billion in new investment between 2017 and 2035 as well as tens of thousands of jobs.
Speaking of the API and other lobbying groups, they’re working hard to persuade the BOEM to open up the leases before 2021. Several Atlantic states have joined in the chorus pushing for the drilling leases based on economic gains to their states. And analysts estimate they have a good chance of success considering how bad things are in the energy sector right now — especially on the jobs front.
Given this outlook, there are two stocks I recommend buying now to benefit from the start of Atlantic drilling.
2 Oil Infrastructure Stocks to Buy
Given the good odds that Atlantic drilling will commence over the next five or so years, it’s going to be a while before oil stocks like Exxon Mobil Corporation (NYSE:XOM) or Apache Corporation (NYSE:APA) start drilling. The Atlantic needs to be prepped first.
The ocean floor of the Gulf of Mexico is strewn with a vast pipeline network that makes getting production from floating platforms to the shore quick and easy. Unfortunately, because Atlantic drilling never caught hold, it doesn’t have the preexisting pipelines. That’s why both McDermott International (NYSE:MDR) and Chicago Bridge & Iron Company N.V. (NYSE:CBI) could be great stock picks. Both are monsters when it comes to building out energy infrastructure.
MDR basically does nothing but design and build offshore energy infrastructure projects. From undersea pipelines to floating containment units, McDermott does it all. And “all” includes building out the Gulf of Mexico’s undersea logistics infrastructure over the years.
MDR stock has fallen on hard times. For one thing, there’s not much to be constructed in the Gulf anymore. Much of its work is already done. Second, with oil prices recently falling, many oil stocks have cut their CAPEX budgets for any possible projects that would come MDR’s way. Less business and revenues isn’t exactly a great thing for a stock. And McDermott’s shares have reflected that reality and today MDR stock sits below $3 a share.
However, given its history, there’s no reason to think that MDR won’t get the nod to build at least some of the Atlantic’s needed infrastructure. That could be the spark that ignites MDR’s struggling shares. It’s risky, but the reward could be great as well.
CBI can be seen as more of sure thing for playing Atlantic drilling. Chicago Bridge & Iron Company builds everything from refineries to LNG facilities. That includes a hefty dose of subsea pipeline infrastructure and offshore production platforms — including those that operate in the Atlantic. Like MDR, CBI should get the nod when it comes to building out the region for oil production.
However, unlike MDR, CBI is already profitable and features a steady backlog of projects from across its various business. The recent oil rout has pushed CBI stock shares down to levels not seen in over a year. Meanwhile, profits are substantially higher and shares can now be had for $38 a share, or a price-to-earnings ratio of less than 7.
The Bottom Line: The recent proposals by the Obama administration and BOEM have paved the way for Atlantic drilling to begin. While it will be a long road, investors have the opportunity to pave the way with CBI and MDR stocks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.