A Stock for the Deepwater Gold Rush

12/20/2011 7:30 am EST


If there’s one thing that investors learn—either the easy way or hard way—is that you can make more money owning the pick-and-shovel companies than you can the prospector,  and the same is true in the quickly growing sector of deepwater drilling, writes Brendan Coffey of Cabot Global Energy Investor.

By the middle of this decade, oil drawn from the seabed more than 2,000 feet beneath the ocean’s surface will double in volume compared to 2010 levels.

Hornbeck Offshore Services (HOS) provides technologically sophisticated offshore supply vessels (OSVs) and transport vessels for the oil and gas industry. It has the youngest fleet of OSVs in the industry, and its ships are designed from scratch.

The company wasn’t involved in the notorious BP (BP) Gulf of Mexico rig catastrophe, other than showing skill in its operations as part of the cleanup team.

But the moratorium on deepwater drilling that was put in place after the Deepwater Horizon’s failure forced Hornbeck to rethink its approach. Hornbeck management broadened its horizons to promising deepwater regions such as Brazil and territorial waters of Mexico in the Gulf of Mexico and off Trinidad.

And now that the moratorium has been lifted in the Gulf, Hornbeck is primed to benefit from continued strength in that region as well.

The company has amassed a fleet that today stands at 51 OSVs and nine double-hulled barges and another nine ocean-worthy barges. At the moment, Hornbeck has another 16 OSVs under construction, so management clearly sees big demand ahead.

Hornbeck also has four multipurpose service vessels (MPSVs), which are movable platforms that can lift and haul rigs and provide heavy deepwater support services.

Looking at revenue projections compiled by management in early November, the diversification strategy is taking shape. Prior to 2010, no Hornbeck vessels were situated in Brazil; 14 are there now, 12 of which are under long-term commitment to Petrobras (PBR) and two others working spot business for other companies.

We like Hornbeck’s competitive advantage in newer OSVs, which tend to be larger than older OSVs and have a higher safety quotient, top of mind in the industry after the Deepwater Horizon spill.

Even with the recent secondary offering and the third quarter loss, HOS is trading near three-year highs and seeing good institutional support after breaking out of a short-term bearish channel in late November.

The nadir of that channel completed a 50% retracement of the prior trough-peak trading, which is a sign of an orderly shakeout that bodes well for long-term price action.

Some resistance will manifest itself at $36, with potentially tougher layers of selling probably due in the high $40s. Support is at $32 and $29. We recommend buying in the $30 to $34 range.

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