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

30Comments
Mar 22, 2013 2:30PM
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Great for the oil & drilling companies.  There will be some jobs.  Problem we don't have enough refineries & pipelines.  Most of the new oil will be exported for higher prices.  The days of cheap gasoline are gone.  One problem is the government regulations for gas blends, there are over 500 mandated by EPA.  We should have one year round blend for the entire country (best possible blend) and three grades of octane.  One of the reasons gasoline prices are high is Ethanol.  Get EPA & government out of gasoline formulation.  Ethanol also causes premature wear and tear on a vehicles engine (burns too hot & creates too much moisture).  Stop making Ethanol (made from corn) would also lower food prices.  Also mandate that all oil found in USA waters be used to satisfy USA demands plus 90 day reserve of gasoline & diesel, before any oil or derivitives can be exported and sold.  The price per barrel of world wide oil would decrease to a reasonable level and so would the price of gasoline & diesel fuel.  Food & transportation costs would decrease, thereby stimulating the economy (more disposable income)...more jobs.  Along with this repeal Obamacare and the economy would thrive.  Then the only people not working would be the disabled (and that's okay), and the looser Welfarers & "Freebie Society".  And for those last two start cutting their benefits and make them work and contribute to the economy. No work, no benefits.
Mar 22, 2013 1:34PM
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Strange that Obama didn't make some mention of this new find......and other recent discoveries, or is it?  It tends to weaken his position on fossil fuels and allows him to continue to foist his views on solar and other alternative energy onto the public.....and at the same time give tax payer money on his cronies and continue to rape the economy..
Mar 22, 2013 11:23AM
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have stock in an oil company,get your gas for free with the dividends it pays out.

Mar 22, 2013 3:53AM
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Anadarko and Statoil are also heavily involved in the major discoveries off-shore East Africa. These and the Gulf will take 5 to 8 years to reach full production, but the cash-flow will be transformational for them and the drillers and other sub-contractors.  For patient investors these are opportunities to watch a several-bagger grow over a decade, making 2013 share prices look ridiculously cheap.
Mar 22, 2013 1:46PM
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So, what you're saying is we may be Bakken up the wrong tree?
Mar 22, 2013 10:37AM
Mar 22, 2013 12:50PM
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You don't see Obama touting any of theses finds to the American people/////////////
Mar 22, 2013 12:29PM
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So, 500 million barrels of crude is about a 25 day supply for the US.   Why is this some sort of game changer?
Mar 21, 2013 9:35PM
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I love the dividends my stocks give me.Where are the dividends with gold.Us single

guys need goof off money.

Mar 22, 2013 11:19AM
Mar 22, 2013 12:49PM
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I believe the accepted definition of a "major oilfield" is one billion barrels or more of recoverable oil. After all, the world uses one billion barrels of oil every 11 days.

 

For the most recent month for which data is available, October 2012, the world consumption of oil averaged 94 million barrels of oil per day.

94 million barrels of oil per day X 11  days =  1,034 million(1.034 billion) barrels of oil consumed in 11 days.

Mar 22, 2013 12:12PM
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The oil industry is what keeps the world moving. I have been a pround member of it since 1968.
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Mr. Jubak!

Excellent reporting.  Thanks!

William B. Smith

Mar 22, 2013 12:24PM
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if only our govt would get off their asses and let the auto industry make hydrogen cars big oil wouldn't make so much money off us....then again the govt wouldn't rake in all the needed gas tax   
Mar 22, 2013 12:54PM
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That is good news, more supplies. I am looking for funds to drill 3 billion barrels in the Safari Lands.  And that should add to the global supplies. Anyone there? 
Mar 22, 2013 12:43PM
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This should bring down the price of gas to $0.99/gal. Well if we dare to dream.

Mar 22, 2013 12:32PM
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"The oil industry is what keeps the world moving. I have been a pround member of it since 1968."

 

There's the oil, to be sure. But right up there with it are war and an unsustainable rate of population growth.

 

Your pride (and apparently your pround) well may be misplaced.

Mar 22, 2013 3:29PM
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According to my morning e-mails...(which connect to this ARTICLE !!!)....Relate..!!

 

Statoil or (STO) just won about 85 bids on Wells and new Drilling locations in the Gulf of Mexico..

Obama, is doing a great job of getting more oil and selling it to the Oil Companies...

Bush just wanted to Fight Wars and get our Kids KILLED, In the name of OIL...

What a price, we have had to pay....For NOTHING !!!!!

Mar 22, 2013 4:27PM
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Just what we F' ing need, MORE fossil fuels to trash the planet with. File this under further proof of human DE-evolution.

 

Robert F. Kennedy Jr: In the next decade there will be an epic battle for survival for humanity against the forces of ignorance and greed. It’s going to be Armageddon, represented by the oil industry on one side, versus the renewable industry on the other. And people are going to have to choose sides – including politically. They will have to choose sides because oil and coal, they will not be able to survive – they are not going to be able to burn their proven reserves. If they do, then we are all dead. And they are quite willing to burn it. We’re all going to be part of that battle. We are going to watch governments being buffeted by the whims of money and greed on one side, and idealism and hope on the other.


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