"Gulfing" with Gue

06/17/2005 12:00 am EST

Focus:

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

While many advisors follow the energy sector, few drill as deep into lesser-known opportunities in the sector than Elliott Gue, who focuses exclusively on this sector in his The Energy Strategist. Here's his latest, a look at a play on Gulf drilling.

"Shallow water driller, Todco (THE NYSE), is an excellent play on the currently strong Gulf of Mexico offshore drilling market. It owns essentially two types of drilling rigs: jackups and inland barge rigs. Jackups are designed for drilling in water up to a few hundred feet in depth. They are highly mobile and can be easily carried via barge to the appropriate drilling location. An inland barge rig is designed for drilling in swampy, marshy environments.

"Both types of rig are relatively simple when compared to advanced deepwater rigs and are much cheaper to build. But the market for jackups, and to some extent inland barge rigs, is currently very tight in the Gulf. Some dismiss the jackups as 'commodity' rigs, but that's wrong-headed. Jackup day-rates have risen from less than $30,000 per day a little over a year ago to nearly $60,000 in the Gulf right now. The reason for this jump in day-rates to historically high levels is simple.

"In prior cycles, when Gulf of Mexico drilling activity would pick up, jackups would be towed from elsewhere in the world to meet demand. This time, however, most of the world's jackups are busy in other parts of the world as jackups are in very high demand in markets like India, the North Sea, and Africa. Given the strong market and tight supply, some companies have been having trouble locating rigs to handle their new drilling activity. Some producers are starting to try and lock away rigs on long-term contracts at very high day-rates.

"Todco is uniquely positioned to benefit, as it i s the only firm with a large number of 'coldstacked' rigs. They were put in storage in the weak drilling market of the late 90s to help cut costs. Now, for a relatively small investment in reactivation, the rigs can be brought back into working condition. No other shallow-water driller in the Gulf has meaningful spare capacity. But Todco can bring its nine coldstacked rigs back into service to take advantage of the strong market. I've been waiting for the past few months for Todco to start announcing that it's bringing back the coldstacked rigs. Now, the company has started doing just that.

"Already, one of Todco's jackups is being reactivated under a contract with the Angola Drilling Company. The jackup is expected to begin service in August on a two-year deal at a day-rate in the upper $50,000 range, which is right at the top of the current market for jackups. An inland barge rig has also been reactivated. I had already recommended this stock, but these moves to reactivate its coldstacked rigs leaves me feeling even more positive about the stock. Right now, Todco offers an opportunity to participate in a very strong Gulf of Mexico drilling market. Buy under $26, looking for a move to the $30-$35 range over the summer."

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