A Flood of Money is Headed Toward Oil Investors
By Matt Badiali
September 26, 2007

Big Oil is on a spending spree in the Gulf of Mexico.

Last month, the oil companies of the world spent more than $289 million on 18 million potentially oil rich acres in the Gulf of Mexico. The U.S. Mineral Management service packaged the acreage, located off the Texas coast, into 282 tracts.

The big winner was British Petroleum, which scooped up 91 tracts and spent $31 million. The big spender was Norway's Statoil, which paid more than $138 million for 36 tracts.

The lure of giant fields in the Gulf drew 47 companies to the auction. This list is interesting because it includes some quasi-state owned oil companies, such as Statoil and Brazil's Petrobras. In fact, these two companies are relative newcomers to the Gulf of Mexico.

Neither company is new to offshore drilling, though. Petrobras is one of the world's best deepwater drilling outfits... and currently operates 40 offshore drilling rigs, primarily off the coast of Brazil. The company has a single rig drilling in the Gulf of Mexico, Rowan's Bob Palmer. Statoil operates 24 offshore rigs, but none in the Gulf of Mexico.

There's a great reason the Gulf of Mexico is getting all this attention. It's one of the few remaining regions in the world with huge potential, and is owned by a government that doesn't claim the oil. Quite the opposite, the United States embraces competition for the oil.

The key to investing in these projects is to remember that they take a long time to complete. If you are investing in the purchasing company, don't expect a quick payoff. It will take years for you to see a return on the project. (Full disclosure: Petrobras is a tremendous deepwater operator... S&A Oil Report readers are up 58% on the stock since February.)

However, if you invest in the service companies that immediately benefit from these deepwater spending sprees – the picks and shovels – you'll continue to see terrific returns over the next six months to several years. As Big Oil spends that money, it will show up in the quarterly earnings of the service companies.

A nice ETF to conservatively capture these gains is the PowerShares Dynamic Oil & Gas Services Portfolio (PXJ). Some dominant service providers included in this fund are Schlumberger, National Oilwell Varco, and Halliburton. As oil flirts with $80 per barrel, oil-service earnings will rise considerably faster than the companies that employ them.

Good investing,

Matt Badiali