Hello Old Friend – Offshore Exploration Is Going to Bounce Back

Freedom Financial Archive | Originally posted Dec 22, 2022
  • The demise of offshore exploration has been greatly exaggerated.
  • Brazil is one of the key areas for this sector.
  • I’ll give you some great names to follow, so you’re ready to pounce.

Everyone’s favorite sector is poised to come back bigly in 2023 and beyond.

That’s right, oil drillers, subsea and seismic are coming back stronger and faster than a ‘90s boyband.

There’s still time to get in with the brokers that will take you to site visits in Singapore, Korea, Brazil, Greece among other choice destinations, as well as building your portfolio.

In fact, the oil price selloff may give you a much better entry point.

But why now?

And why are the nearly demised offshore drillers and seismic going to come back when we have all that oil from shale and, of course, all that energy from solar panels and windmills?

If you’ve tuned into us long enough, then you know shale is near its peak and can’t contribute significantly to growth.

As to solar and wind, well let’s just say they should rebrand to 5-hour energy and sell at gas stations.

(To be fair, they already sell solar at Costco near me).

It’s not just shale, 5-hour-renewable energy, and OPEC’s own inability to grow that spur our call on exploration.

It’s the fact the industry all but cut their budgets to $0 since 2016, leaving us with a massive resource gap to fill.

There’s good reason behind that drive to exit exploration, punctuated by ConocoPhillips quitting deep-water altogether: cost.

The drilling rig and seismic market were completely out of order in the early 2010s. From Aramco’s $1 million drilling rig day rate to stories of seismic companies bidding for jobs they wanted to lose at 40% mark-ups and winning!

The whole industry was running through the same door at once, and it showed in returns and capital destruction.

This time is exactly like every other time. We stop spending on oil. Next, we suddenly realize that we don’t have enough. And then young men (and women) are launching themselves off the coast of Rio in search of riches.

Exxon and Chevron announced increases to their capex budgets in 2023 vs. 2022, which itself was already significantly higher than 2021.

Combined, the two majors are spending an additional $10 billion in 2023 vs. 2021 levels.

Petrobras plans to allocate $6 billion over the next five years to exploration alone.

If its current plans are kept by the next administration, the Brazilian national oil company would drill 42 exploration wells, 16 of those in Brazil’s Equatorial Margin basins.

At an average of 120 days to drill an ultra-deep exploration well (UDW), it would require at least two high-spec rigs for a five-year term.

If we include Brazil’s Southeast basin, that’s a total of 5 UDW rigs just for Petrobras’ exploration spending.

On the development front, Petrobras will drill over 300 wells.

Those are faster to drill but need more completion and subsea installation.

Assuming a conservative 90 days for drilling, mobilization and demobilization of these rigs, Petrobras would need upwards of 15 UDW rigs for 300 wells drilled over the next five years.

There are of course other operators in Brazil, from Equinor to Total Energies that will put in new production platforms in the pre-salt.

Brazil alone may represent upwards of 25 UDW rigs for the next five-year period.

If we are correct that shale and OPEC won’t be enough to offset global production declines, then there is bound to be another rush to offshore exploration.

We simply have not found it. In fact, we’ve not looked for other regions to supply.

And Russia’s geopolitics make it even harder to develop in oil-rich areas such as Kazakhstan or the Arctic.

Guyana will be part of the solution, but far from enough.

The oil services sector, especially offshore, was decimated in the last cycle.

Few public companies remain after severe rationalization of capacity, people and companies.

That is part of the opportunity set offshore.

As was the case 15 years ago, there is not enough capacity, and that capacity is likely to call for a premium as exploration ticks up.

Seismic, drilling, and subsea services may all start to catch a bid.

Shipyards, especially those capable of building high-spec and LNG (Liquefied Natural Gas) tankers, are also well positioned for the next order cycle, but will likely be hit by lower containers and other transportation vessels.

Where to find those who are looking?

There are few areas of interest outside US shale, as that part of the industry garnered much of the non-national oil company investment over the past decade.

There’s Brazil’s massive pre-salt, which is well understood, has running room, and is as close to a sure-thing resource-wise as you’ll get in exploration.

But of course, Lula’s next term is a major risk since he nearly bankrupted Petrobras and held up progress in the region for 10 years in his first two terms.

Guyana is likely the third most visible growth region in global oil & gas, but there are few ways to play it.

The country’s exploratory success is highly concentrated in the ExxonMobil and Hess partnership.

But that will likely demand lots of rigs and FPSOs (some are already on order) to continue development. It helps that Exxon’s massive new FPSO developments will likely need dozens of well connections, a boom for subsea and drilling rigs.

A floating production storage and offloading (FPSO) unit is a floating vessel used by the offshore oil and gas industry for the production and processing of hydrocarbons, and for the storage of oil.

Outside of those, exploration is likely to resume, or rather accelerate, in the equatorial region of Latin America, boosted by the success in Guyana.

Brazil and Suriname are the most likely candidates, with the latter having some poor results to date, but still potential for surprises.

We also expect West Africa to make a return to the rolls of drilling companies.

High government takes have slowed down activity in Angola, Nigeria, and Ghana, all of which have considerable resource upside.

Namibia, where discoveries are yet to be developed, may also be a target for further exploration.

The need for more LNG capacity may also trigger investments in Mozambique, although the country’s political and fiscal issues still are a barrier.

Names to follow

The list is standard: all the companies that were decimated but managed to survive the last cycle.

There are age-old behemoths, like Transocean and Saipem (if you are OK taking Italian risk), and Diamond Offshore.

There are the subsea group, with Subsea 7 and NOV, SBM Offshore, etc.

If you’re looking for more beta, the seismic group may be your choice, the real boom and bust subsector.

PGS, CGG and TGS all trade near 3x 2023 Ebitda and are likely to see further growth as companies raise their exploration budget.

They may be the first and hardest bounce if exploration returns.

Drilling rigs may also be in for a re-rating, as most of the lower-spec, earlier vintage capacity has now been permanently scraped.

It’s a dicey group with lots of restructuring and legacy debt that has been chipped away over the past 6-7 years.

But if exploration and offshore development are to recover, day rates and backlogs will jump and with that, earnings.

The group trades at 6x 2023 EV/Ebitda with Transocean at the high-end at 8.5x, while Noble and Helmerich & Payne are below 5x.

Until next time.

Kind regards,

Freedom Financial News