The stock market doesn’t close on Columbus Day, but the holiday-shortened week is usually a slow one for news. That hasn’t been the case this year.

Shares of most offshore-focused contract drillers, including Transocean (NYSE: RIG), Noble Corp (NYSE: NE), Diamond Offshore Drilling (NYSE: DO) and Gushers Portfolio holding Seadrill (NYSE: SDRL), rallied sharply on Tuesday after the Obama Administration officially ended the offshore drilling ban in the Gulf of Mexico. The moratorium was scheduled to sunset on Nov. 30, but the administration decided to end the ban early amid intense bipartisan pressure from Gulf Coast lawmakers.

Investors shouldn’t expect business to return to normal in the Gulf. The official moratorium has ended, but a de facto ban will persist well into 2011. Technically, drilling in the Gulf’s shallow waters wasn’t prohibited, but the government has been slow to issue permits. Less than 10 new shallow-water drilling permits have been issued since the April spill, compared to a more normal level of 10 to 30 per month.

A similar slowdown will likely occur in deepwater permitting. New regulations include stepped-up inspections of blowout preventers (BOP) and cemented wells. A company’s CEO is also required to certify that a well has been drilled properly, potentially making top executives liable for their company’s wells.

As I’ve written since the spill happened, none of this will end deepwater drilling activity; the deepwater remains among the most exciting regions for oil and gas development in the world. However, it will take many months for operators to sort through all the new requirements, and the new rules will make them cautious about submitting new applications for drilling. The Dept of the Interior likely will keep the ban more or less in place by simply delaying the issue of new permits or refusing to issue new permits at anything close to the rate that it did before April.

But even as US deepwater activity will take more than a year to recover, activity abroad is accelerating. The international rig count–the number of rigs operating outside North America–recently hit an all-time high. Drilling, exploration and production work offshore West Africa and Brazil continues to pick up steam, even as the Gulf remains in regulatory limbo.

In addition, there has been a marked pick-up in interest in contracting both deepwater and shallow-water rigs abroad. Some shipyards have reported inquiries about new rigs, suggesting that the pick-up in demand is part of a longer-term cycle.

My investment thesis remains unchanged: The big winners in contract drilling are companies that own relatively new and technically advanced deepwater and shallow-water rigs. I continue to prefer firms with either little exposure to the Gulf of Mexico or a geographically diversified footprint. Seadrill offers the best combination of these qualities and has the scope to raise its quarterly dividends over the next year or so. Buy Seadrill under 31.

Noble Corp and Diamond Offshore Drilling have the most to lose in a post-Macondo environment. Both firms have heavy exposure to the Gulf of Mexico and own older rigs that will require substantial upgrades to comply with new regulations.

As I explained in the most recent issue of The Energy Strategist, I expect the broader market to rally into year-end, accompanied by a particularly strong move in energy-related stocks. Such a rally would drag shares of Diamond and Noble higher; a strongly rising tide lifts all boats. However, I continue to recommend a short position in Diamond Offshore Drilling as a hedge. Investors with significant long exposure to energy stocks should consider holding a short position or two to reduce overall volatility during market declines. Sell Diamond Offshore Drilling short above 60.

Continued strength in the global rig count backs up my bullish outlook for oil-levered stocks as 2010 winds down. I’m adding Cameron International Corp (NYSE: CAM) to the Wildcatters Portfolio as another play on this trend. I will write more about Cameron in an upcoming issue, but the company is a leader in subsea equipment that’s used to drill offshore oil and gas wells.

Cameron manufactures BOPs, a device that’s designed to shut off deepwater wells during emergencies. In fact, one of Cameron’s BOPs failed on the Horizon rig in the Gulf. However, as I’ve explained before, Cameron isn’t liable for the oil spill in the Gulf; the BOP on that rig was a decade old and was maintained and inspected by the rig operator, not Cameron.

Cameron will benefit from new US regulations, as rig operators will look to install new and more powerful BOPs on their rigs. I also expect many contractors to hire Cameron to maintain their BOPs in an effort to enhance safety.

In addition, Cameron makes a variety of subsea valves and pipes that are installed on the seafloor when a new deepwater well is drilled. These businesses all benefit from strengthening drilling activity. Cameron International Corp rates a buy under 46.

Investors should now be accumulating shares of my favorite oil-levered plays, including Schlumberger (NYSE: SLB), Weatherford International (NYSE: WFT), Suncor Energy (NYSE: SU), Afren (LSE: AFR) and Baker Hughes (NYSE: BHI). Consult the model Portfolios for specific buy targets.

It’s a Gas

Interest in North American unconventional oil and gas acreage has been red hot this year; the first half of 2010 brought a record $21 billion in new merger and acquisition activity. And the deals keep coming.

China’s state-run oil major China National Oil Company, or CNOOC (NYSE: CEO), paid USD1.08 billion and assumed more than USD1 billion in drilling costs to buy a 33 percent stake in Chesapeake Energy Corp’s (NYSE: CHK) Eagle Ford Shale acreage. On the same day, Statoil (Oslo: STL, NYSE: STO) and Talisman Energy (TSX: TLM, NYSE: TLM) made a major purchase in the same region.

The Eagle Ford is attractive because of its low costs and high-value oil and natural gas liquids. I am preparing a detailed report on North American unconventional oil plays for the next week’s issue of The Energy Strategist. Wildcatters Portfolio recommendation EOG Resources (NYSE: EOG) holds prime acreage in the Eagle Ford and is a buy up to 115.