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Four Picks for Investing in the Deep-Water Boom

These service firms and drillers deserve attention from investors.

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Deep-water exploration is seen as the new frontier for oil and gas companies seeking the next big find. With offshore wells costing up to $200 million to drill, it is an expensive decision for oil and gas companies. As a result, the firms rely on oil services companies to provide additional expertise in finding, analyzing, and drilling for the valuable resources. Accordingly, our oil services universe is enjoying some of the strongest results in more than two decades, as high oil prices have created a windfall for oil and service firms alike.

Finding and successfully exploiting a deep-water find such as  Petrobras' (PBR) Tupi, estimated to hold 5 billion to 8 billion barrels of oil equivalent, is certainly a challenge for any firm. First, extensive seismic shooting (often covering hundreds of miles) must be done to determine where the reservoir is located and where the first wells should be drilled in order to obtain the most information about the size and quality of the reservoir. Seismic firms, like  CGGVeritas (CGV), provide survey vessels to get the job accomplished. These vessels are equipped with air guns that fire on regular intervals towards the sea floor as the vessel moves along a predetermined surveying path. Long streamer arrays contain hydrophones that collect any energy reflected from beneath the sea floor. Once the survey is completed, seismic firms and producers will analyze the data to determine the best drilling sites. Second, a drilling contractor, such as  Transocean (RIG) or  Pride International  (PDE), needs to be hired to drill the well. The well can be as deep as 35,000 feet, requiring months and months of expensive drilling time and equipment built to withstand the high temperatures and high pressures at the bottom of the well. Ultra-deep-water rigs that can drill in waters up to 10,000 feet deep may cost up to $750 million and command day rates of more than $650,000 a day. In addition, highly trained employees from both the driller and a services firm such as  Schlumberger (SLB) must keep the project on track and continuously assess the reservoir to figure out exactly what type of oil services (such as fraccing) are needed to best exploit the reservoir. Once the well is completed, subsea specialists such as  Acergy (ACGY) may be hired (depending on the economics) to install pipelines that stretch hundreds of miles from the bottom of the ocean floor to a land-based production facility.

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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.