Atlantic Coast Oil Drilling is Opening Up

Last Friday, the Obama administration approved a plan that would allow companies to look for oil off the Atlantic coast.

The decades-old ban on drilling in the Atlantic was lifted by Congress in 2008, but it was put on hold after the BP oil spill in the Gulf of Mexico in 2010.

This hiatus is easing, though the plan does not yet authorize any particular seismic surveys, and companies would still have to apply for site-specific permits. But it does start the process of determining if there is oil out there and, if so, in what quantities.

The Bureau of Ocean Energy Management last estimated in 2012 that there was 3.30 billion barrels of oil and 31.28 trillion cubic feet of natural gas in federal waters off the East Coast. This would represent 4% of U.S. oil and 8% of its gas.

These numbers will prove to be low, however, as they are due to old seismic information and are based on outdated drilling techniques. The truth is that bureaucrats in this country have been underestimating hydrocarbon resources for the past 15 years.

Companies were drilling in the Atlantic from 1947 to the early 1980s. Most holes came up dry or were non-profitable.

Thirty wells were drilled in the Baltimore Canyon Trough, about 100 miles off the coast of New Jersey, Maryland, and Virginia. Five wells tested significant flows of gas from Jurassic rocks at rates as high as 18.9 million cubic feet per day.

A three-dimensional seismic was made, but due to falling gas prices in the 1980s, the tracts were uneconomic, so they were plugged. The last leases were relinquished in 1984.

That said, new real-time seismic techniques, octopus drilling technology, and flexible jackup rigs, coupled with $102 oil prices, would make these wells pay.

280,000 Jobs

The American Petroleum Institute predicts that if drilling were allowed in the Atlantic, it would contribute $23.5 billion to the U.S. economy annually until 2035 and add 280,000 new jobs.

The next five-year U.S. offshore oil and gas leasing plan will run from 2017 to 2022. The BOEM pointed out in its press conference that the seismic testing framework does not mean a decision has been made on whether the Atlantic will be included in the new five-year plan.

That said, surveys of the Atlantic coast could begin as early as next year.

The Public Wants it

Despite the caterwauling you will hear from Turtle Lovers United or the Kind Friends of Dolphins, most of the public wants more oil.

According to the Pew Research Center, support for offshore drilling dropped to 44% in favor versus 52% against after the Deepwater Horizon spill in 2010. But by March 2012, support for increased offshore drilling had returned to its pre-Deepwater Horizon level, with 65% in favor versus 31% against.

Regardless, with oil as expensive as it is, and with the oil-producing regions of the world in seemingly endless conflict, I am 95% certain Atlantic oil drilling will happen within the next five to ten years.

Who Wins?

The opening of drilling in the Atlantic will benefit companies that offer seismic work and floating oil rigs, including Ensco (NYSE: ESV), Noble Corp. (NYSE: NE) and Transocean (NYSE: RIG).

And the good news is that these companies are cheap and trading at cycle-low valuations. They all have trailing P/E ratios in the single digits. RIG even pays a 6.60% dividend.

There is risk, however. They are cheap because the majors stopped drilling offshore due in part to the Great Recession and in part to massive onshore oil and gas finds.

These stocks have a lot of debt, and rig rental rates have been falling for years. But when offshore picks up again — and it will — these stocks can move up fast.

Other companies, like Ocean Rig UDW (NASDAQ: ORIG), look promising with their newer, more modern rigs. If you like value and are willing to wait for the turnaround while collecting fat dividends, look to the offshore drilling contractors and service companies.

All the best,

Christian DeHaemer Signature