Is Deep Water Drilling Dead?

05/27/2010 11:58 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of The Energy Strategist, shares his outlook for the future of deepwater drilling and what companies may benefit in the aftermath of the disaster. Elliott, the mess in the Gulf of Mexico has put deepwater drilling in the forefront right now. What's your take on this?

Elliott Gue: Well, I don't think you are going to see a ban on deepwater drilling. The simple fact is that almost 30% of US oil production comes from the Gulf of Mexico deepwater and offshore. It is even a little a higher percentage, almost a third. If you look at it, the US can't really sustain a situation where that would go away and they would have to import more oil to fill the gap, and that would put a real strain on global oil supplies, actually, and I think that you could see oil prices really spike on something like that. I think what's more likely is just a lot more regulation surrounding the deepwater drilling industry.

Q: With the Gulf disaster, do you see any more emphasis on alternative energy?

A: Well, I don't really think there is a near-term alternative to oil. I think, really, a lot of the focus is going to be on making deepwater drilling safer and maybe just a lot of regulations surrounding it. If you look back at the Exxon Valdez spill, in the wake of that, a lot of new regulations were passed on the age tankers could be and whether single-hulled or double-hulled. So I think you are going to see a lot more of that type of regulation about all aspects of what is on a rig, you know, what's used in drilling, and I think that's going to open up a lot of opportunities for companies involved selling into that market.

Q: Any picks for investors?

A: A couple. One is Seadrill Limited Ordinary Share (NYSE: SDRL). Seadrill is a contract driller that focuses on deepwater rigs. One of the things about them that is very interesting is that they have one of the youngest fleets of deepwater rigs. Eleven of their 14 deepwater rigs are build after 2008. And I think you are going to see a preference for newer deepwater rigs now because the Horizon was about ten years old. A lot of producers are going to say, "If we have newer rigs with newer equipment on there, maybe we'll have a little less liability in the event of a spill or a problem." It offers a nice yield, as well, of about 9.5%.

Q: Any other companies that you like? A: Sure. Cameron International (NYSE:CAM) is the company that built the blowout preventer was also ten years old. Typical warranty on a BOP—a blowout preventer—would be about a year or two, and after that, the driller is actually responsible for maintaining the blowout preventer, so I don't think Cameron has any liability whatsoever, and more likely, what's going to happen is the government is going to come in and say we need more powerful blowout preventers.

Q: Do you have positions in any of these stocks?

A: I do. I own both of them

Q: Thank you

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