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A Gold Rush in the Gulf

The BP (BP) oil spill is all but a distant memory as the number of deepwater rigs operating in U.S. waters is poised to reach a record high this year.

Driven by sustainable high crude oil prices, new lease agreements and successful exploration missions, activity in the industry is flourishing.

And the government is becoming one of the region’s biggest proponents.

As a part of its strategy to decrease foreign oil imports 30% by 2020, the Feds are opening up the western and central regions of the Gulf of Mexico for auction. As a result, a mini gold rush effect has occurred among drillers.

In its sale of mainly the central region leases in March, over 50 companies submitted 407 bids for drilling rights that claimed a mass of 38.6 million acres.

The drillers requesting the leases are scrambling to meet the ever-present energy demand of the world. Premium jackup rigs have been at 100% capacity in June, pushing day rates 13.2% year-over-year to $140,875.

A huge level of demand most likely won’t overwhelm the industry. Expansion plans are in place to make sure of this. The overall floater fleet is projected to increase 31%, and jackup fleets are on pace to increase 18%.

These efforts contribute to optimistic predictions from analysts, including some saying oil service companies will see their revenue triple from $4 billion in 2011 to $12 billion in 2015.

And one company that’s really sitting pretty right now is Atwood Oceanics (ATW).

Going Deep

Atwood is in the midst of a serious new build program. The company currently has a fleet of 13 mobile offshore rigs, but it aims to double that.

Consequently, revenue is expected to rise 33% this year to just over $1 billion. And earnings are expected to follow suit, rising from $5.11 per share in the current fiscal year to $6.08 in 2014.

While Atwood Oceanics plans to grow globally, these lofty expectations couldn’t be met without Atwood Oceanics’ undertakings in the Gulf of Mexico region.

The company has moved its Atwood Condor into the Gulf, and currently has three ultra-deepwater “Dynamically Positioned Drillships” under construction. They’ll be delivered to sites in the Gulf of Mexico upon their completion.

These ultra-deepwater rigs allow ATW to operate at further depths and more extreme conditions – an absolute necessity for the hurricane-plagued Gulf.

Of Atwood Oceanics’ three types of rigs – ultra-deepwater, jackups and semi-submersibles – only two are in the ultra-deepwater category.

In the second quarter, they accounted for 22.33% of total revenue. Such performance from incoming rigs in the upcoming years should add to the segment’s share in revenue.

As it stands right now, ATW is relatively undervalued. Priced at 11.84 times earnings, it sits considerably lower than the industry’s average of 15.38.

Analysts at Raymond James recently increased their price target on the stock to $67 – a 28% premium to where shares currently trade.

But that’s not all.

Rumors are floating around that Atwood Oceanics may be a takeover target for a larger company like Ensco (ESV), a top-ranked global provider of offshore drilling services, or General Electric (GE), a giant with great buying power that’s expanding into the energy sector.

And “the chase” continues,

Matt Senseney