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Deep-water drilling is largely defined as drilling in water depths greater than 500 feet. The subsea industry refers to the equipment and services that are specialized for use in this underwater activity. Newly discovered oil fields hundreds of miles offshore combined, with the high probability for larger finds create conditions ripe for growth. Just recently, Royal Dutch Shell (RDSA) installed the world’s deepest platform, which floats 8,000 feet above the ocean floor in the Gulf of Mexico. The $3 billion platform, named Perdido, has the capability to drill 30,000 feet below the earth’s surface, and highlights the vast investment that is needed for these deep-water projects.

Even with the oil market’s volatility over the last year, we expect investment in new rigs and subsea equipment to grow, as countries strive to gain energy independence. Politically, developing these offshore fields helps governments create jobs, increase tax revenues, and stimulate overall economic activity. Forecasts suggest billions of dollars will continue to be invested in rigs, platforms, and subsea equipment by the likes of Chevron (CVX - Free Chevron Stock Report), BP P.L.C (BP), Exxon Mobil (XOM - Free Exxon Stock Report), and Shell, to name a few.  

In fact, Africa, South America, and Asia are projected to significantly boost offshore exploration and production in the coming decade. In Brazil, Petrobras (PBR) has estimated that offshore production could double to five million barrels a day in 25 years. Additionally, the oil giant has current commitments totaling over $224 billion through 2014 for its deep-water activities. This market alone stands to drive substantial growth in new and aftermarket equipment orders.  

The United States should also be a strong market, with output expected to double in the Gulf of Mexico by 2020. Of course, we cannot mention the Gulf without touching on BP’s Deepwater Horizon platform disaster in 2010 that released between four to five million barrels of crude oil into the ocean. The area is still on the mend; however, activity has picked up this year, after the government opened over 20 million acres for drilling at the end of 2011. Another positive sign has been the improving deepwater rig count, which stands at 29 rigs, and is gradually returning to pre-spill levels.  

No doubt deep-water drilling comes with many challenges including harsh weather, underwater pressure concerns, and the corrosive nature of salt water. Drillers and subsea equipment operators must constantly invest heavily in technology to combat these unfavorable conditions. Though the recent regulatory scrutiny could be seen as a setback, we believe it should be a net benefit for subsea equipment providers. The BP spill only highlights the importance of safer, more innovative technologies. 

The equipment involved in a deep-water platform is very similar to that of land operations. A derrick, pipes, a wellhead, a blowout preventer, drill-bits, and cement are crucial to the process. However, with increased risk and environmental concerns more prominent, specialized equipment will continue to be developed for both safety and increased productivity. Remotely operated vehicles (ROVs), manifolds, subsea trees, umbilicals, and subsea controls are just some of the technologies developed over the decades.

The “subsea tree” is one of the most crucial components of the operation and an important indicator in determining the health of the subsea industry. A “tree” is an assembly of valves attached to the wellhead, which helps to control the flow in and out through flow lines to a platform. These trees act as a conduit for various other applications with regards to production and performance. In 2010, there were a little over 300 subsea trees awarded, and forecasts suggest that number should grow to between 700 and 800 a year by 2015. 

These projections for “trees”, coupled with the limited competition and high barriers to entry, make it a promising opportunity for investors. The two big leaders that have generally captured a lion’s share of “tree” awards are Cameron International (CAM) and FMC Technologies (FTI). Historically, these two companies have combined to grab 75% to 80% of the market share, though General Electric’s (GE - Free General Electric Stock Report) Oil & Gas unit and Dril-Quip (DRQ) have made some headway in recent years.  

We anticipate significant prospects for drillers, producers, and equipment operators, as increased investment, awards, and further exploration should remain strong in the coming decade.  Subsea equipment spending alone is expected to exceed upwards of $15 billion by 2015 compared to the $9 billion invested in 2010. We believe the longer-term growth trends in deep-water activity, combined with any uptick in oil prices, should augur well for stocks with exposure to the subsea industry.

For a more detailed evaluation of the companies mentioned here, and the particular investment merits of the stocks, subscribers are encouraged to view our full-page reports in The Value Line Investment Survey.

At the time of this articles writing, the author did not have positions in any of the companies mentioned.