Most subscribers are aware that I recommend shallow water driller Todco (NYSE: THE) as an excellent play on the currently strong Gulf of Mexico offshore drilling market. The company’s recent reactivation of offshore rigs that had been coldstacked–in long-term storage–leaves me feeling even more positive about the stock. If you’re not already in Todco I recommend buying the stock now under 26 and placing a stop-loss at 21.75. I am looking for a move to 30 to 35 this summer. I’ll continue to follow this stock in The Energy Strategist.

Todco owns essentially two types of drilling rig: jackups and inland barge rigs. Jackups are designed for drilling in water up to a few hundred feet in depth. These rigs are essentially a platform with long legs that actually touch the seafloor. They are highly mobile and can be easily carried via barge to the appropriate drilling location.

An inland barge rig is designed for drilling in swampy, marshy environments. These rigs look like normal barges and are simply towed into position and flooded with water so that they sink and touch the bottom.

Both types of rig are relatively simple when compared to advanced deepwater rigs like semisubmersibles and drillships. They’re also much cheaper to build. But the market for jackups, and to some extent inland barge rigs, is currently very tight in the Gulf. Some dismiss the jackups as “commodity” rigs but that’s wrong-headed–jackup day-rates have risen from less than $30,000 per day a little over a year ago to nearly $60,000 in the Gulf right now.

The reason for this jump in day-rates to historically high levels is simple. In prior cycles, when Gulf of Mexico drilling activity would pick up, jackups would be towed from elsewhere in the world to meet demand. This would depress day-rates; that’s why some are quick to dismiss the jackup market as a low-margin drilling market.

This time, however, most of the world’s jackups are busy in other parts of the world–jackups are in very high demand in markets like India, the North Sea and Africa. In fact, while drilling demand is very strong in the Gulf of Mexico some rigs have actually been leaving the region to meet demand elsewhere in the world.

Given the strong market and tight supply, some companies have been having trouble locating rigs to handle their new drilling activity. Some producers (mainly independents like Swift Energy) are starting try and lock away rigs on long-term contracts at very high day-rates. They are doing this because they are desperate to make sure they have rigs available when needed.

Todco is uniquely positioned to benefit. The reason is that Todco is the only firm with a large number of coldstacked rigs–these rigs are in long-term storage. The rigs were initially coldstacked in the weak drilling market of the late ’90s–by storing them, Todco was able to cut costs. Now, for a relatively small investment in reactivation, the rigs can be brought back into working condition.

No other shallow-water driller in the Gulf has meaningful spare capacity. But Todco can bring its nine coldstacked rigs back into service to take advantage of the strong market.

I’ve been waiting for the past few months for Todco to start announcing that it’s bringing back the coldstacked rigs. Now, the company has started doing just that. Todco is negotiating long-term drilling contracts at very high day-rates for these rigs. Once a contract is agreed upon, Todco makes the investment required to reactivate the rigs.

Already, one of Todco’s jackups is being reactivated under a contract with the Angola Drilling Company. The jackup is expected to begin service in August on a two-year deal at a day-rate in the upper $50,000 range–that’s right at the top of the current market for jackups. An inland barge rig has also been reactivated–the barge market is a little slower right now but is
beginning to heat up.

Longer term, as I’ve outlined in The Energy Strategist, I expect most of the major new oil and gas discoveries to be in deepwater. But that doesn’t mean the shallow water players should be ignored. And right now, Todco offers an opportunity to participate in a very strong Gulf of Mexico drilling market.