No question, the offshore industry is making a big comeback on the back of high oil prices and depleted onshore resources, but which companies are benefitting most? Royal Dutch Shell and Chevron are good candidates, for starters.

It wasn’t so long ago that deep sea drillers were flat on their backs, victimized partly by their own hubris (see Deepwater Horizon oil spill, 2010) and hounded by Washington politicians and federal regulators.

Political gland-handers were only too happy beat offshore drillers like a piñata with one hand, making sure the media cameras were rolling whack after enthusiastic whack, while taking millions in campaign contributions from oil and gas companies with the other hand.

The latter occurrence may be hypocritical, but it’s not surprising. According to the political contributions watchdog group Maplight.org, which tracks contributions to members of U.S. congress on a regular basis, on average, U.S. House members raise $1,900 per day for their election campaigns – about $1.4 million per House member, MapLight says.

Comparatively, U.S. Senators do even better. They raise, on average, $3,400 per day, or about $7.5 million, based on 2008 campaign season figures from MapLight. The oil and gas industry contributed $19 million to politicians so far in the 2012 election season, according to the left-leaning Center For Responsive Politics - $17 million to GOP candidates and $2 million to Democrats, who are viewed widely by oil industry insiders to be more hostile to oil and gas companies.

This article isn’t about politicians and campaign money, but to understand how tough offshore drillers have had it for the past few years means taking a good, long look at how adamant those politicians were in banning offshore drilling in the Gulf of Mexico in the aftermath of the Deepwater Horizon spill.

But that was then and this is now. A new report from the New York City-based Paragon Group says offshore drillers are rebounding nicely from that two-year term in regulatory purgatory, and the group is poised for stronger growth in 2012 and 2013.

“Nearly two years ago the offshore-drilling industry was in danger of collapse under the pressure of lawmakers and regulators pushing to ban offshore drilling in reaction to BP's oil spill and Transocean’s rig explosion,” says Paragon. “The industry persevered and now seems to be in the midst of a comeback as rising oil prices and depleted resources are forcing major oil companies to focus on exploration and development of offshore oil and gas reserves.”

Paragon adds that oil companies are once again turning to the high seas as those regulatory burdens abate. But even more so, deep-water drillers are rising in numbers as the rush to get oil and gas out of the ground may be losing some steam, just as oil demand is picking up steam.

“Offshore oil and gas reserves have been an increasing focus for energy companies as significant oil discoveries on land are becoming less common,” adds Paragon. “With recent offshore discoveries and the large amount of underdeveloped oil and gas fields, demand for mobile offshore-drilling units (MODU) are expected to increase dramatically. Major energy companies such as Royal Dutch Shell and Chevron have already reinvested earnings in offshore ventures. The International Energy Agency (IEA) expects global oil demand will rise from 88 million barrels today to around 99 million barrels in 25 years' time.”

What do analysts see in both Royal Dutch Shell and Chevron as they kick-start drilling efforts in the Gulf? Great quarterly numbers, with reason to believe that outperformance will keep rolling on.

Royal Dutch Shell

The first quarter of 2012 was a home run for Shell, with revenues and earnings both up, and significantly so, on a year-to-year basis.

  • Revenues were up to $119.9 billion. Analysts at S&P capital had pegged revenue growth at $107.6 billion.
  • Sales posted were 9% higher than the $109.9 billion earned in Q1 2011.
  • Average earnings for Q2 2012 are expected to clock in at $111.61 billion, and estimated average earnings-per-share is $2.24.
  • Average revenue earnings for 2013 is estimated to be $469 billion, with the outlook on earnings-per-share at $9.24.

Analysts monitored by S&P Capital call Shell an “outperform”, and call for an average price target of $82 per share (it was trading at $71 per share as of May 1). Wall Street generally credits Shell’s sterling first quarter to higher oil prices and income generated from new exploration and recovery projects – areas that should improve as RDS re-commits to the Gulf of Mexico.

According to Zacks Investment Research, Shell’s crude oil production contributed 47% to gross volumes, with total oil and gas output 4% higher than 2011. Zacks expects that trend to continue in 2012.

“The Hague-based group continues to make solid progress with its three-year strategic plan that commenced in 2010,” says Zacks in an April research report. “Shell has been able to boost returns and remain competitive by embarking on aggressive cost reduction initiatives, exiting unprofitable markets, refocusing its efforts on emerging economies and streamlining the organization.”

Chevron

Chevron is another deepwater oil producer that leveraged high crude oil prices to earn big first-quarter profits.

  • Earnings-per-share rolled in at $3.39, above the Zacks estimate of $3.30, and adjusted 2011 profit of $3.17.
  • Quarterly revenue rose by 0.6%, to $60 billion, which saw some dampening against expectations from the falling price of natural gas – a big market for Chevron.
  • U.S. crude oil output fell by 6.2% on a year-to-year basis, but its re-emergence in the Gulf should boost output in 2012 and 2013, analysts say. CVX stock, which was trading at $106 per share on May 1, has a one-year target estimate of $125 per share, according to a survey of analysts by Thompson Financial Network.

“Despite the slight dip in Chevron’s quarterly volumes, we believe its production outlook remains one of the most robust in its peer group, with a number of major initiatives scheduled to come online during the next few years,” Zacks says in an April research commentary on Chevron. “Major start-ups during the last few months include the deepwater Usan project in Nigeria and the Caesar/Tonga project in the deepwater Gulf of Mexico.”

Deutsche Bank energy analyst Paul Sankey sees Chevron stock rising to $130 per share, about 22% ahead of the stock’s current trading price. But he cautions investors to be patient about CVX – possibly until 2014.

“Chevron is a waiting game,” he says in a recent research report. “In fact, a multitude of waits. We are waiting for final capex spend to emerge on major projects, we are waiting for volume growth to start in 2014. We are waiting for cash return from the $19 billion cash pile. We are waiting to be sure there are no acquisitions instead. We are waiting for the multiple to expand and reflect its high Brent leverage, short U.S. natural gas, high profitability, and its high returns.”

Drillers On Top Again?

Slow and steady may win the race here, as offshore drillers like Shell and Chevron capitalize on high crude oil prices, and re-access into the oil-rich Gulf of Mexico. It may not exactly be a “sweet spot” but both companies are worth a long look by growth and value-minded investors.