The Next Offshore Drilling Boom Is Coming

Nick’s Note: Regular readers know we’re bullish on energy. In fact, one of our favorite ways to play this has been to buy fracking companies.

But when it comes to picking natural resource companies, there are few better than our friends over at Casey Research. Today, we turn to my colleague Nick Giambruno, who is the globetrotting protégé of legendary speculator and gold investor Doug Casey. In today’s essay, Nick shares another way to play the booming demand for energy…


By Nick Giambruno, editor, Crisis Investing

On April 20, 2010, 40 miles southeast of the Louisiana coast, an offshore oil rig named Deepwater Horizon exploded into a giant fireball.

It was the worst environmental disaster in U.S. history.

The blast killed 11 workers and crippled the drilling platform. The entire rig eventually sank.

The explosion also caused four million barrels of oil to spill into the Gulf of Mexico. It was the world’s biggest marine oil spill—ever.

Some of the mess washed ashore in Alabama, Florida, Louisiana, Mississippi, and Texas, destroying thousands of coastal businesses. The rest poisoned once-rich Gulf fisheries.

It took almost two months to cap the oil well and stop the flow. By that point, the tab for the damage was over $50 billion.

The negative media coverage was nonstop. It was the worst-case scenario for offshore drillers. Everyone hated them, including investors.

The U.S. offshore rig count (a convenient marker of the oil industry’s health) collapsed following the disaster. It fell 80% from April 2010 to July 2010.

Today—after some additional setbacks—the industry is finally poised for its big comeback.

This is partly because the Trump administration is moving to peel back offshore drilling regulations. I’ll get to those details in a moment.

But first, you need to know a bit about the oil market as a whole.

“Volatility Can Be Your Best Friend”

The oil market is highly cyclical. It goes through regular booms and busts, just like other commodity markets.

For investors, this can be a good thing. As Doug Casey says:

Volatility can be your best friend, as long as your timing is reasonable. I don’t mean timing exact tops and bottoms—no one can do that. I mean spotting the trend and betting on it when others are not, so you can buy low to later sell high.

Oil experienced a major boom cycle from 2002 to 2008. The price of oil skyrocketed 704% during this period. It went from $18 per barrel in 2002 to $145 in 2008.

Then, oil plunged 80% as the 2008 financial crisis unfolded, down to a low of $30 per barrel.

Oil went through a new boom cycle from 2009 to 2014. The price of oil topped out at $114 during this cycle.

Then, in late 2014, the U.S. and Saudi Arabia colluded to keep the oil market saturated. Low oil prices hurt the Russian and Iranian economies, which both depend heavily on oil sales.

This created a new bust cycle. Oil plummeted 76%. Then the cycle turned again.

The price of oil has been going up since it bottomed in 2016. But it still hasn’t reached its previous highs. That’s because it hasn’t had the right catalyst yet.

A regional war in the Middle East—which looks increasingly likely as Iran and Israel pick away at each other—would certainly do the trick.

But I think the offshore drilling industry is set to soar regardless. If nothing else, it’s long overdue for a “catch-up” rally…

Regulation Stalls Recovery

Offshore oil production matters. It accounts for about 30% of the world’s oil supply.

The U.S. offshore drilling industry eventually stabilized as cleanup from the Deepwater Horizon accident progressed. The offshore rig count grew steadily from the end of 2010 through 2014 as the oil price rose.

Then the price of oil plunged 76% during the 2014–2016 bust cycle. And the offshore rig count plunged right back down with it.

The rig count started to increase again after oil bottomed in February 2016. For a moment, it looked like the offshore oil industry would recover with the price of oil.

Then the rig count suddenly reversed course. It plummeted to its lowest level in over 10 years.

The reason? Regulation.

It took six years for the federal government to react to the Deepwater crisis. Then in 2016, it significantly increased offshore drilling regulations.

The Obama administration banned all new offshore oil and gas development within more than 100 million acres of the Atlantic coast. It also blocked nearly 94% of drilling on the outer continental shelf—the area between coastal waters and the deep ocean.

This was a major problem for offshore oil drillers.

You see, the offshore oil business goes through its own booms and busts, just like the oil market as a whole. In the last cycle, oil drillers brought too many rigs into the market at the wrong time.

Just as the industry was finally putting the Deepwater Horizon accident behind it, the price of oil tumbled. Offshore drillers got crushed.

While the price of oil and most oil stocks has been rising since 2016, the offshore oil industry has floundered.

I think that’s about to change.

A Long Overdue Recovery

Earlier this year, the Trump administration moved to lift Obama’s offshore drilling ban. This would allow new offshore oil and gas drilling in nearly all U.S. coastal waters.

Trump’s proposal would also free up 90% of the outer continental shelf for offshore drilling. This bodes very well for the U.S. offshore oil industry.

Offshore drilling activity, as measured by the rig count, has increased significantly over the past few months.

Right now, utilization for all offshore rigs is at 74.2%. Optimal utilization is 80%. The industry isn’t there yet. But there’s been a notable improvement since 2017, when it hovered in the 70% range.

This is a good sign that the offshore oil industry is starting to recover from its worst ever downturn.

The sentiment about offshore drilling is increasingly positive. Investment dollars are flowing back into production capacity. It looks like 2017 marked the bottom for the offshore oil industry.

Offshore oil stocks have lagged behind other oil stocks. So even a “catch-up” rally would send stock prices higher.

In short, these companies are very cheap right now and are poised for an uptrend. Couple that with the positive outlook on the price of oil, and you’re looking at an excellent crisis investing opportunity.

Regards,

Nick Giambruno
Editor, Crisis Investing

P.S. As I write, tensions are growing between Israel and Iran… and their much more powerful allies. I think a big Middle East war is highly likely right now. Of course, I’m not cheering on a war. But it would certainly make the price of oil spike—and send offshore oil stocks even higher. I shared the best way to play this trend in the latest issue of my advisory, Crisis Investing. You can find out how to subscribe right here.

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