Drilling for Value in the Deepwater Resurgence

On Wednesday, I spoke with Jim Cramer about the Gulf of Mexico, and about how quickly the excitement is returning for deepwater drilling. After three years of declining production in the Gulf, we are now poised to see a return of production growth, perhaps even to eclipse the growth of the much-more-hyped tight-oil plays of the Bakken and Eagle Ford.

That's great for investors, because the stocks most closely associated with GoM deepwater drilling have been left mostly for dead since the BP (BP) Macondo disaster of 2010. As compared with the high-flying Bakken stocks, these are values that shouldn't be overlooked.

I'm going to give you a few specific ideas on where to look for that value.

First, the Gulf of Mexico only contains a few key players, unlike shale oil plays. For the majors, Shell (RDS.A) and BP still dominate the deepwater assets in the Gulf, with Chevron (CVX) and ConocoPhillips (COP) making inroads, particularly after the latest massive deepwater finds at Coronado and Shenandoah. While Shell is too diverse to take advantage of by-investors looking for Gulf-specific stocks, BP is not. That company has sloughed off assets to pay for Macondo, but it has retained much of its Gulf production, including its very juicy "mad dog" deepwater field off the coast of Louisiana.

The overhang of Macondo is finally about to disappear, whether for good or for ill, with the resolution of the ongoing civil suit in New Orleans. BP shares, therefore, are finally poised to begin making up the almost 40% in lost ground that they have had to shoulder to the other majors since 2010. I was careful not to even mention BP for three years, but the time has come. BP is now worthy of a play.

Outside of the majors, Anadarko Petroleum (APC) is by far the largest independent outfit in the Gulf. The stock has been a core holding of mine, but it has rallied quite smartly already in 2013. So, if you don't have a position in it yet, I'd look elsewhere for GoM ideas.

One other place you can look is Cameron (CAM), which reported a small miss today and revised guidance downward. This might look bad, but the break in the share price is a gift for investors looking to start a position. Cameron is a servicer of blow-out preventers, and its backlog is now approaching $10 billion, up from $8.6 billion at the start of the year -- a sign of just how hot deepwater is becoming again.

Another place to try is Seadrill (SDRL), which has been pounded recently and offers a shaky dividend of more than 9%. While I don't believe that juicy payout is necessarily safe, Seadrill has been slowly selling its shallow-water fleet to concentrate on deepwater operations. That strategy hasn't helped in the short term, as the stock has indicated. However, if the production in deepwater remains on a strong trajectory, 2014 will be a banner year for Seadrill, with day rates for big rigs perhaps eclipsing the $1 million mark.

The bottom line is that deepwater drilling in the Gulf of Mexico has been an overlooked subsector in energy since 2010 -- but there are a lot of reasons to believe that's about to change big time, and for the long haul. Now's the time to find some long-term value to buy.

At the time of publication, Dicker was long APC.