Oil discovery triggers black gold rush

Here's how to find some winners, as oil companies turn their focus to the Gulf of Mexico.

By Jim J. Jubak Mar 21, 2013 8:57PM
On Wednesday, shares of Anadarko Petroleum (APC) rose 3.7%, on news the company had made a major discovery in the deep waters of the Gulf of Mexico. The find at the Shenandoah-2 well could produce more than 500 million barrels of crude.

As important as the discovery is for Anadarko and its partners ConocoPhillips (COP), Marathon Oil (MRO) and Cobalt International Energy (CIE) --  analysts estimate it was worth $3 a share to Anadarko investors -- the find has even bigger implications for oil production in the Gulf of Mexico as a whole. It’s large enough to turn the efforts to explore the entire Lower Tertiary trend into a gold rush.

The Lower Tertiary trend, with sub-regions such as Walker Ridge and the Shenandoah formation, is a very deep water play that could hold up to 15 billion barrels of oil. By deep, I mean deep and expensive. The Shenandoah-2 well was drilled through almost six miles of rock, in water 5,800 feet deep. Wells that deep cost big bucks; a deep-water well can cost $130 million and dry holes easily run to $10 million. That makes spending money on the best available seismic imaging technology a no-brainer.

Anadarko’s discovery in the Shenandoah formation isn’t an isolated event. Since 2010 Exxon Mobil (XOM) has found the 700-million barrel Hadrian field, Royal Dutch Shell (RDS.A) has discovered the 500-million barrel Appomattox field and Chevron has found the 200-million barrel Moccasin field, all in the Gulf of Mexico’s Lower Tertiary trend. BP (BP) estimates that its Mad Dog field could hold up to 4 billion oil-equivalent barrels.

Can investors already pick some winners from the Lower Tertiary trend discoveries?

Let me suggest a few.

Anadarko, of course, and traditional Gulf of Mexico powers such as Chevron. But also some names that investors don’t normally associate with the Gulf of Mexico, such as Norway’s Statoil (STO). As part of its effort to diversify beyond its core fields off Norway, the company has been expanding in the Gulf of Mexico. On Wednesday, Statoil announced  it won the bidding on another 15 leases in the Gulf of Mexico, bringing its total number of leases in the area to 340.

One focus of those leases has been the Walker Ridge area of the Lower Tertiary trend.

The deep water nature of these finds will put more upward pressure on the day rates for deep water rigs. That’s good news for drilling service companies with strong fleets of deep water rigs such as Transocean (RIG), Ensco (ESV) and SeaDrill (SDRL).

And the high cost of drilling in this complicated geology -- with a salt layer that makes getting a good understanding of the rocks under all that water extremely challenging -- will make high quality 3D seismic imaging a hot commodity. That plays to the strength of Schlumberger (SLB).

Down the road, the development of these oil fields will produce a lot of business for companies such as National Oilwell Varco (NOV), FMC Technologies (FTI) and Gorman-Rupp (GRC).  Significant sale volumes from this new area of the Gulf of Mexico, however, are still years away.

Maybe the biggest long-term winner is the U.S. economy. These discoveries will come into production in plenty of time to take up any decline in production from the on-shore shale oil discoveries of the Bakken and other formations.

Because this type of well has very little history, there is worry these wells will show very fast depletion rates. If true, that would mean the current U.S. oil boom would be very short-lived. So the discoveries in the deep water Lower Tertiary trend of the Gulf of Mexico should go a long way to alleviating those fears.

Schlumberger, SeaDrill, and Statoil are all members of my Jubak’s Picks portfolio.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did own shares of Ensco, Schlumberger, SeaDrill, and Statoil as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here


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