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Sarfaraz A. Khan
Sarfaraz A. Khan
Articles (62)  | Author's Website |

3 Undervalued Oil Majors Betting Big on Gulf of Mexico

December 12, 2013 | About:

Gulf of Mexico is one of the primary resources of energy for the U.S. Its offshore oil production represents a little less than a quarter of the U.S. crude oil production while its offshore natural gas production accounts for 7% of the total U.S. dry production. Its coast is home to 40% to America’s total refining capacity and 30% of America’s natural gas processing plant capacity. In short, its importance to America’s enormous energy industry cannot be overstated.

According to energy consultants Wood Mackenzie, the daily production from the deepest parts of Gulf, in water depths of more than 1,300 feet, will be around 1.5 million barrels of oil. This would represent more than a 15% increase from the projected production of 2013. Moreover, amid the increasing E&P activity, some of which is discussed below, by 2020, average production at the Gulf of Mexico is expected to cross 1.9 million barrels per day.

According to Bloomberg, by Sept. 26, more than 800 permits were issued in the Gulf of Mexico, which represents a record gain of 14% from the same period last year. Moreover, Baker Hughes has reported by the end of September, 62 rigs were operating at the Gulf, which is the highest count in the last four years.

Despite its massive setback at the Gulf of Mexico, the European oil major BP Plc (NYSE:BP) is gearing up to significantly increase its production from the region in the coming years. After the oil spill disaster in 2010, it was generally considered that it would take BP several years to resume its operations at the Gulf of Mexico. Moreover, the production drop from the Gulf of Mexico was also expected to last longer. But none of this has happened. The recent discoveries in the region have encouraged oil majors from around to world to spend billions on exploring crude from deep and ultra-deep water positions.

BP remains one of the leading players at the Gulf of Mexico. Last month, the company announced the deployment of two more oil rigs at the Gulf, taking its total tally to nine rigs. More importantly, the company is now operating more rigs at the Gulf of Mexico than ever before. This is understandable since BP holds more deep-water acreage at the Gulf than any other operator.

One of these new rigs that the company brought is Seadrill’s (NYSE:SDRL) West Auriga, an ultra deep-water drill-ship that has started drilling at BP’s iconic Thunder Horse field and is capable of operating in up to 12,000 feet of water. The second rig has replaced one of BP’s previous rigs which got damaged during Hurricane Ike in 2008. This rig will work on BP’s long-standing Mad Dog Platform.

However, BP is not stopping here and has bigger plans for the future.In the next 10 years, the company will invest at a rate of “at least $4 billion” per year in deep-water projects at the Gulf of Mexico. The business will predominantly focus on four large production platforms; Thunder Horse, Atlantis, Na Kika and Mad Dog. These four enormous platforms are located in depths of around 4,500 feet to 7,000 feet. These four fields represent a total capacity of around half a million barrels of oil equivalents per day.

Beside these four platforms, BP also holds non-operated interest in three other platforms at the Gulf of Mexico: Mars, Ursa and Great White. Royal Dutch Shell (NYSE:RDS.A) is the operator of Mars, Ursa and Perdido spar (Great White).

Shell is also one of the major players at the Gulf of Mexico. This year, the company’s subsidiary Shell Offshore has received dozens of drilling permits in the current year for water depths of less than 10,000 feet. The company has also bid for around $144 million lease acreage at the Gulf of Mexico in 2013, which is higher than any other operator. Shell operates six major deep water and ultra-deep water floating platforms and 12 fixed structure platforms at the Gulf of Mexico. Moreover, the company also claims to have the largest contracted drilling rig fleet at the Gulf of Mexico.

While the two European oil giants are leading the way at the Gulf, America’s second largest integrated energy company Chevron (NYSE:CVX) will also spend $12 billion as it gears up to launch its two deep-water platforms that are currently under construction. These two facilities, known as Jack St. Malo and Big Foot, will add230,000 barrels of oil to the company’s daily production. The two platforms will come online by the fourth quarter of 2014. These platforms will treble Chevron’s current output from Gulf of Mexico and are in line with the company’s strategy to produce 3.3 million barrels of oil equivalents per day by 2017.

Low Valuation

These three oil majors (BP, Shell and Chevron) are trading at significantly lower multiples of trailing earnings and sales, as compared to the industry average. Moreover, they give considerably higher yields as compared to the industry’s average. In terms of valuation, these three oil majors, whose shares have been under pressure due to various reasons that are outside the scope of this article, are looking attractive. Among them, BP is the cheapest as it is trading just 6.25 times trailing earnings and just 0.36 times trailing sales. On the other hand, Shell, which is relatively more expensive, gives an attractive yield of more than 5%,


Shell Offshore Drilling Permits

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website

Rating: 3.5/5 (2 votes)


Shadowgal - 4 years ago    Report SPAM
Good article. I agree, these oil companies seem to look like bargains right now in the market.
Sarfaraz A. Khan
Sarfaraz A. Khan - 4 years ago    Report SPAM
thank you Shadowgal

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