$100 oil prospect drives deepwater Oil Services boom

Deepwater is one of the few areas where good prospects of major oil finds still remain, and these are mainly outside the control of OPEC. In a note to clients, John Westwood, MD of international energy analysts Douglas-Westwood said “over the past year the stock prices of a grouping of 10 companies with significant exposure to the sector (the Douglas-Westwood Deepwater Index) has risen by an average of 79% and one, Wellstream, by 157%”.

Deepwater now accounts for almost 15% of total offshore oil and gas production, but over the next few years its total share relative to shallow-water output will grow, to around 20% of offshore production by 2011.

“In our May 2004 newsletter when oil was $40 we stated our view that, “the recent high prices are just a practice run,” and that the low oil price party was almost over, said Westwood. “As oil prices then rose, mainly driven by Chinese demand, so did oil company stock prices helped by a surge of M&A activity. Then stock price gains slowed dramatically as the larger deals were done and the realization dawned that ‘big oil’ needs big reserves to prosper – reserves that are now mainly in the hands of national companies. It quickly became obvious to us that the oil majors need a new business model.

“Then investors discovered oil services. In the year to November 1st 2007 the Philadelphia Oil Services Sector Index (OSX) has showed a gain of 56% compared with the FT Oil Index of E&P companies which registered an 11% gain. But deepwater oilfield services at 79% growth have even outperf ormed the OSX.”

More than a decade ago, Douglas-Westwood forecast that deepwater oil & gas would develop into a high growth sector. The latest edition of “The World Deepwater Market Report” forecasts that annual deepwater Capex will reach nearly $25 billion by 2012.