April 21, 2017 By patrickpistor 2 Comments

Deepwater Investment: A Prime Opportunity?

deepwater investment
I recently attended the IADC - Houston chapter's monthly luncheon at the Petroleum Club of Houston. These luncheons are a great opportunity to network with people working on the upstream side of the oil and gas industry. They usually have speakers who give market insight into the market that you would otherwise not get unless you worked in their organizations.

Dale Bradford of Murphy Oil gave a speech he called "Make Deepwater Great Again," a play on the Trump campaign slogan (complete with red ball cap).

And if you happen to work in the deepwater market of the oil and gas industry, you know this is a sector of upstream oil and gas that is in desperate need of revitalization.

Oil Prices "Lower, Longer"

With depressed oil prices staying around the $50/bbl mark, there hasn't been much of an appetite to invest in the deepwater market. At least not when there are other, less capital-intensive projects related to U.S. land drilling.

If you look at the range of costs associated with the various drilling programs around the world, U.S. shale, Gulf of Mexico deepwater, Middle Eastern land, North Sea, etc. The median price of oil needed to make all of these projects viable is around $62/bbl, with some project in each category being viable at a much lower oil price.

Why haven't the big oil companies been willing to invest in deepwater Gulf of Mexico projects?

Rig Backlog: Good and Bad

A lot of the existing deepwater drilling rig backlog was signed well before the crash in oil prices. When times are good for drilling contractors, they tend to look for longer-term contracts with day rates as high as they can get them. The opposite holds true for the operators; they want longer-term contracts when day rates are depressed.

With offshore drilling being hit the hardest – lots of stacked rigs and an oversupply of drilling units – prices for deepwater drilling rigs continue to fall.

Why aren't operators taking advantage of the current market conditions?

“They have too much backlog as it is.”

The operators that can afford to operate in the deepwater drilling market are currently saddled with too much rig backlog, even with all the discounts and rig swapping that took place earlier in the down cycle.

With the spread costs of drilling an offshore well being three to four times the cost of the drilling rig itself, some operators would love to pick up a rig or two at the current discounted rate (maybe even getting away without paying a mob or de-mob on the contract). The problem is that they already have too much backlog at rates they really can't stomach.

Companies Are Divesting

With everything that has gone on in the world of oil and gas drilling, some companies have decided to wash their hands of the deepwater market. Still more have decided to focus their efforts on other lower-costs segments of the upstream market. It's no wonder some commentators believe the deepwater market is dying.

Companies like ConnocoPhillips, Devon Energy and Apache have divested their deepwater projects. Others, like Murphy Oil, are hopeful for more profitable conditions as the oil prices slowly creep up past the $50 mark.

Prime Investment Opportunity?

"Buy low, sell high." That is the most basic investment advice, and only slightly more complicated than the first rule of investing, "protect your principal."

If the worst of the downturn is truly behind us, the deepwater market has yet to see a significant improvement in both day rates and activity. This must be one of those "buy low" opportunities. But that is only the case if you can indeed "sell high" in the future (at least higher than the purchase price).

"Buy low, sell high."

Niche Down or Expand Your Verticals

For the players expecting to make money in the inevitable upturn in the market, there are two options. They can either niche down and exploit their core competencies, or expand their verticals to take advantage of the depressed market conditions.

Both options are risky, because they require a tolerance of something that no one in the oil and gas likes: uncertainty.

One thing is certain for now. There just aren't the reserves on land as there are offshore.

As world markets begin to consume the oil surplus, offshore reservoirs are the only source with enough capacity to meet the current levels of demand/consumption.

All of this is little comfort to the deepwater drillers and other rig hands who had to prep their rigs for an extended stay in the shipyard. There's an upside to every down market. One just has to be ready for the upswing once the pendulum starts heading in the other direction.

Filed Under: investment, deepwater, offshore

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