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ConocoPhillips (COP), Apache Corporation (APA): Oil Production in the Gulf of Mexico Is About to Explode

Photo Credit: Apache Corporation (NYSE:APA)

Three years ago an explosion in the Gulf of Mexico basically put a halt on oil and gas production causing many to wonder if the Gulf would ever come back. Today, a combination of high oil prices and recent major discoveries have producers scrambling to lock up additional drilling rigs to increase oil production. Current estimates have producers requiring another $16 billion worth of drilling rigs to handle future drilling in the Gulf.

What’s driving demand?
Two major oil finds earlier this year in the Lower Tertiary part of the Gulf have oil producers excited; this part of the Gulf is the area that is expected to drive the demand for these additional drilling rigs. These wells are drilled more than 20,000 feet below the sea floor in water more than a mile deep. One of the partners in two of the most recent Lower Tertiary finds, ConocoPhillips (NYSE:COP), has quietly amassed over 2 million net acres in the deepwater Gulf. The company was recently the successful bidder on 30 additional blocks which added 172,000 net acres to its position, giving the company plenty of room to explore for additional oil. What’s most interesting about this is that ConocoPhillips (NYSE:COP) is a relative newcomer to the Gulf. It’s well-capitalized newcomers that are a driving force behind the Gulf’s reemergence.

Other veterans of the region, such as Apache Corporation (NYSE:APA), had been wading ever deeper into the Gulf. The company, which is the top producer on the shallower shelf region, had only received about 2% of its production from the deepwater region of the Gulf. That’s likely to change in the future because the company is drilling seven deepwater wells this year. Like ConocoPhillips (NYSE:COP), it too was a recent high bidder on additional deepwater acres, adding five blocks to its acreage in the region. But, Apache Corporation (NYSE:APA) did just announce its intentions to sell a large stake in its Gulf operations to a privately held operator; however, the company chose to retain a 50% stake because it remains excited about the potential. It’s that potential that has producers confident that the Gulf’s best days are ahead, which is illustrated in the following chart:

Source: Enterprise Products (NYSE:EPD) Partners

What’s the play?
While investors could choose one of the oil and gas producers, there is a lot of risk involved. Dry holes are a distinct possibility, Apache Corporation (NYSE:APA)’s five wells last year met with a 60% success rate, for example. Not only that, but investors cannot forget about the possibility of another major oil spill. That’s why drilling contractors, such as Seadrill Ltd (NYSE:SDRL) or Noble Corporation (NYSE:NE), make less riskier plays, while the least risky of all would be an oil pipeline company like Enterprise Products Partner.

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