Oil Boom in the Gulf of Mexico

THE GULF OF MEXICO USED TO BE A THRIVING HUB of drilling activity. But only a few years ago, it was declared a “dead sea.” Exploration slowed, and many oil industry professionals felt that the region would not be as profitable as it once was.

But now the sleeping giant is awakening. Thanks to new 3-D seismic technology, deepwater drilling in the Gulf is experiencing a dramatic resurgence. This Gulf of Mexico drilling renaissance is most evident in the record deepwater lease sales reported these past few months. One of the most recent lease sales in the Gulf topped $2.6 billion, making it the most competitive American lease sale in more than two decades, according to the Houston Business Journal. Bids were sky-high, with the average winning bid increasing by 260% over last year.

There used to be a significant discount for companies that were looking to explore the area. Now that is no longer the case. According to Gulf research analysts, bids that would have been competitive in the past were easily surpassed. BHP Billiton, Anadarko and Hess won less than 25% of their submitted bids, with big bidders Shell, Chevron and Marathon Oil offering significantly more money for the drilling leases.

With these big, new leases come new rigs. New deepwater rigs and drill ships are being built worldwide. This newfound demand is helping some small companies realize huge profits and backlogs.

Just this morning, the New Orleans-based Tidewater, Inc. (TDW: NYSE), which has the world’s largest fleet of offshore vessels, announced plans to renew its fleet. The company is planning to add 50 new vessels by 2011. The average age of the company’s vessels is 25 years old. The company also hinted at shopping around for both outside contracts and possible acquisitions.

The Best of Gulf Oil and Shipping

There’s another steadily growing company that fits this profile perfectly. We’ll call it Company X. This company is, at heart, a small family company that builds and repairs steel and aluminum marine vessels. The company operates multiple shipyards on the Gulf Coast — mostly in Louisiana and one in Texas.

This is more than an investment in boats and barges. It’s also a play on oil production in the Gulf of Mexico. You see, Company X also makes modular components of offshore drilling rigs and floating, production and offloading vessels. The company makes almost every conceivable ship, including barges, single- and double-hull tank barges that haul valuable oil, tugboats and ferries. It’s a booming industry, as you now know. And this company is well positioned to profit.

Its business is split into two separate (and profitable) segments: Vessel construction and repair and conversions. These are fairly self-explanatory. Vessel construction is the engineering, design and building of new boats, barges and other equipment. And repair and conversions encompass all work performed on an existing piece of equipment. While the shipbuilding side of the business operates on land at the company’s facilities, the repair business is mobile. Most repairs are made on floating dry docks or the ships themselves.

Amazingly enough, Company X’s stock remains virtually undiscovered. It has an extremely low price-to-earnings ratio, and it trades for less than its annual sales. It’s still trading at “dead sea” prices as the new Gulf boom is beginning to take shape.

We’ll keep our eyes out for more to come from this boom…

Greg “Gunner” Guenthner
January 15, 2008

The Daily Reckoning