Lower prices seem to be making fools of us all in the oil patch. Plays that were once viable — given much higher oil prices — have now been regulated to the pile of things to forget about. Exploration-and-production firms have continued to abandon shale fields left and right and have pulled-up/idled drilling rigs. The situation is similar for the opportunities that lie in the deepwater of the Gulf of Mexico.
It simply isn’t profitable for many energy stocks to tap these fields with oil in the $50 per barrel range.
Yet, some energy stocks looking to tap the Gulf of Mexico’s deepwater riches have glimmers of hope. That hope comes from a hefty dose of new technologies that aim to reduce the costs of opportunity in the deepwater of the Gulf. Those new technologies could help bring down the cost of drilling right into today’s range of $45 to $60 per barrel.
That means the Gulf of Mexico’s oily gold rush could very still be on. For investors, the opportunity could be immense.
Huge Opportunity for Energy Stocks
The southern reaches of the Gulf of Mexico could be a virtual gold mine for those energy stocks willing to take the plunge and drill the 10,000 feet below the surface plus five miles or so beneath the ocean floor. The Gulf’s Lower Tertiary is an ocean of oil and natural gas.
Similar to Brazil’s rich pre-salt fields, the Lower Tertiary geology is just brimming with potential energy reserves. Early estimates on the play’s potential have the field containing between 14 and 40 billion barrels of oil. Putting those numbers into perspective, recent estimates for the all energy reserves in the U.S. — shale, offshore and conventional wells — sit just north of 29 billion barrels. That’s a staggering amount of oil and natural gas locked with the Lower Tertiary’s borders — worth about $2.4 trillion at current oil prices.
The problem is that at current oil prices, the play doesn’t exactly make economic sense.
Drilling that field is an expensive proposition. We are talking about the ultra-deepwater here. Energy firms must cope with extreme depths — below water and ocean floor –, well temperatures of up to 300 degrees and pressures of 25,000 psi. That makes fracking the Eagle Ford seem like a cakewalk.
In addition, oil that deep and under such volatile conditions doesn’t exactly spring forth to surface “Jed Clampett style.” It takes plenty of advanced technology to find and move that oil up to the surface. For example, in order to exploit its massive Jack/St. Malo projects, integrated Chevron Corporation (NYSE:CVX) installed a production platform the size of two professional soccer fields for a cool $7 billion.
Those kinds of dollar amounts have meant that the Lower Tertiary’s vast oil riches have been pretty much off-limits for energy firms over the last year or so. Until today. New technology has allowed producers to drive down the costs of tapping the field into today’s relatively low energy price environment.
New drill bits, remotely operated vehicles (ROVs), state-of-the-art high pressure and high temperature (HPHT) drilling rigs and a hefty dose of applied fracking technology have continued to drive down the cost of producing in the region. Additionally, that technology is allowing producers to extract even more from the salt-covered field.
Currently, Lower Tertiary wells yield only about 6% of what’s actually held in a reservoir of crude oil. New drilling technology continues to up that percentage. That’s important as every 1% increase can add about $2 billion in revenue to an energy stock’s bottom line at $50 per barrel oil.
In fact, better technology has made CVX’s Jack/St. Malo projects commercially viable at today’s oil prices.
HAL-BHI: The Energy Stock to Buy
Given the long-term riches of the Lower Tertiary that is now profitable for energy producers, investors may want give the region a try. And Halliburton Company (NYSE:HAL) may be a top choice.
King HAL has long been the go-to energy stock when it comes to fracking technology onshore in North America’s shale fields. However, Halliburton is about to be the technology pioneer in the deepwater Gulf of Mexico thanks to its pending acquisition of Baker Hughes Incorporated (NYSE:BHI).
BHI’s new Hammerhead technology combines deepwater completion and production into one system rather than the traditional piecemeal collection of oil equipment. The Hammerhead technology is the first system of its kind and allows for high-pressure fracking to occur in extreme pressures of the deepest parts of the Gulf of Mexico. Baker estimates that by using Hammerhead, energy producers should be able to pull an extra 30,000 barrels per day. That’s worth about $550 million dollars of energy per year, per well.
BHI predicts that Hammerhead should help energy producers improve their recovery rates by 2% per well over the 20-year lifespan of the system. All in all, the deepwater drilling system should help operators realize a positive economic payback from the Gulf’s deepwater assets at current oil prices.
So, the incentive to use BHI’s system is certainly there — especially since many of these assets were starting to be developed when oil was costing around $100-plus per barrel. Chevron, BP plc (ADR) (NYSE:BP) and Anadarko Petroleum Corporation (NYSE:APC) have significant exposure to the field.
Now, those hefty acreage leases could finally be worth drilling. And while BHI hasn’t set pricing or begun production of the equipment just yet, you’d better believe that energy stocks like APC or BP will be shelling out money just to get their hands on the Hammerhead.
For HAL, the technology acquired through buying BHI is just another way it could win the battle against Schlumberger Limited (NYSE:SLB). Offshore drilling has traditionally been SBL’s forte. Now, the new BHI-HAL combo has a powerful weapon to take SLB on in one of the most prolific fields in the entire world.
At a price-to-earnings ratio of 18, HAL stock isn’t exactly cheap. However, Halliburton is trading for about half of its 52-week high as investors have digested the crash in fracking and land drilling. Yet, that number could be a long-term bargain as HAL — via its BHI acquisition — could become a major player in deepwater drilling. For investors, the time to buy HAL could be now.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
