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Gulf of Mexico “deepwater” permit sales took in $102.4 million

Xun Yao Chen, Industrials Analyst

The importance of permit sales

Permit sales are leading indicators that tell where future location of exploratory and developmental drilling may occur. This can help investors understand where oil companies are bidding, and what kind of rigs or ships they’ll employ to conduct drilling activities. Will they be jack-ups that are used in shallow waters, or will they be floaters such as semisubmersible rigs or drillships that drill in deepwater and ultra-deepwater levels?

(Read more: Diana Shipping: the most undervalued dry bulk shipping company)

Bid for August Western GOM (Gulf of Mexico)

On August 23, 2013, the BOEM (Bureau of Ocean Energy Management) auctioned more than 21 million acres of offshore Texas for oil and natural gas exploration and development. The Western Gulf of Mexico Lease Sale 233 drew 61 bids that amounted to $144 million and high bids of $102.4 million. The highest bid of $30 million was offered by ConocoPhillips for Alaminos Canyon Block 475, where other successful findings were made in the past. Those include Trident, Silvertip, Great White, and Tubago sites with water depth of about 8,000 feet. As shown in the above chart, most of the August sales were made for sites in deepwater+ levels (4,500+ feet).

John Rodi, BOEM Gulf of Mexico Regional Director, told reporters, “The number of tracts receiving bid is fairly low compared to many previous western sales when our leasing began in 1983. However, the good news is that the dollar value of the high-bid submitted puts this sale far from the bottom.” He also added that it was a trend that they’ve been seen in the past, where companies are bidding on smaller tracts but are spending more on those purchases. Limited success in terms of exploration of discoveries in the Western area of the Gulf of Mexico is the likely reason why the sale wasn’t too exciting.

(Read more: Dry bulk capacity growth slows further, encouraging sign for later half of 2013)

Deeper and farther away from the shore

August’s sale continues to be evidence that oil companies are searching for oil farther away from the shore and away from the shallow waters where jack-ups are commonly used. The current trend remains positive for offshore drillers that have semisubmersible rigs and drillships in the Gulf of Mexico. While bidding behavior suggests oil companies are slightly cautious, it’s important to note that it may not represent the entire Gulf of Mexico, namely the central planning area.

(Read more: Why favorable oil prices help upstream energy sector spending)

Companies to possibly benefit most

Companies that derive a large portion (25%+) of their revenue from in the Gulf of Mexico include Transocean Ltd. (RIG), Ensco Plc. (ESV), and Noble Corp. (NE). Noble Corp. (NE) and Transcoean Ltd. (RIG) are two that have some idled capacity of semisubmersibles and drillships in the area. While the number of area bid for was smaller, the large sales shows that deepwater-plus water levels are where oil companies are looking to spend more capital expenditure in the future, which should benefit ETFs like the Market Vectors Oil Services ETF (OIH) and iShares Dow Jones U.S. Oil Equipment ETF (IEZ).

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