With all the changes to the United States' energy landscape recently, it's easy to overlook one of the country's most important petroleum-producing regions: the Gulf of Mexico.
For energy investors, drilling in the Gulf is hardly a new story.
U.S. oil companies have been producing in this part of the country for years. Out of the 5 million barrels of crude the U.S. brings to the surface each day, 33% -- or 1.5 million barrels -- comes from this petroleum-rich region.
But if you think this means we're done seeing growth in the Gulf, then you're sorely mistaken.
According to the U.S. Department of the Interior (DOI), the Gulf of Mexico is home to roughly 75% of the nation's undiscovered offshore resources -- the bulk of which has been off limits to U.S. oil companies for years. But starting June 20, 2012, that's all about to change.
Here's the story…
In January, President Barack Obama pledged to open up 38 million acres of virgin drilling territory off the coasts of Texas, Louisiana and Mississippi. Collectively, this central and western Gulf acreage is believed to hold about three-fourths of the nation's potential offshore oil and gas resources.
Former President George W. Bush had already opened this same area for exploration in 2007 before leaving office. But due to political pressure, Obama cancelled the lease sales when he took office.
Now dogged by soaring gasoline prices, which could be a liability during the presidential elections in November, the White House has decided to take down the "closed" sign and replace it with an "open" one.
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This could have a dramatic effect on energy production in the Gulf.
Here's what we know so far:
The U.S. Department of the Interior (DOI) is planning to auction off 7,250 unleased blocks. These tracts are 3 miles to 230 miles offshore in water that are as shallow as 9 feet and as deep as 11,000 feet. The leases cover an area spanning 38 million acres. That's roughly the size of Florida.
The auction is scheduled for June 20 in New Orleans... and the stakes are huge.
As Director the Bureau of Ocean Energy Management (BOEM) Tommy Beaudreau said, "The Central Gulf of Mexico remains the area with the greatest oil and gas potential in the entire United States outer continental shelf."
Overall, the BOEM estimates there are 31 billion barrels of oil and 134 trillion cubic feet of recoverable reserves in the central Gulf -- nearly a 4.5-year supply of oil and a 5.5-year supply of gas for the United States. That's a big prize waiting to be uncovered. Any of those 7,250 blocks could be hiding a bonanza...
One stock that looks good now, but will likely look even better after June 20 is Anadarko Petroleum (NYSE: APC).
As one of the world's largest independent oil and gas producers, Anadarko is one of the top players in the Gulf. The company has a working interest in more than 500 lease blocks that cover approximately 3 million acres.
Anadarko has spent about $8 billion hunting in the Gulf and other places since 2005. And those investments have paid off in a big way -- adding 4 billion barrels to the firm's potential resource base.
Better yet, Anadarko has a proven ability to develop new discoveries more quickly and efficiently than its peers. The credit belongs to eight production platform hubs, which link to satellite fields in the region.
As it stands, Anadarko pulls about 110,000 barrels of oil equivalent out of the Gulf of Mexico every day. This accounts for one-sixth of the firm's overall production. And management has its sights set on 100 potential new targets.
So when the DOI opens up 38 million new acres for exploration, odds are good that Anadarko will be knocking at the door. Even if they don't, then the company is still poised to bring mega-projects such as Heidelberg and Lucius online within the next two years -- both of which are brimming with more than 200 million barrels of oil and gas.
Let me warn you though... There are plenty of risks associated with drilling in the Gulf. Deepwater well leaks can lead to lost revenue, fines, litigation, permit delays, public relations headaches and other serious problems that can send investors running.
But during the past 5 years, Anadarko has maintained an 80% success rate for deepwater exploration and appraisal, the best in the business. Over the same time frame, the company has raised annual sales volume by 144 million barrels, booked 1.5 billion barrels of new reserves, and generated $2 billion in free cash flow.
All of that has translated into an 85% return for stockholders.
Of course, past performance doesn't guarantee future results. But it does give you a good indication of the type of company this is.
Action to Take -- > With the June 20 lease auctions unlocking a wave of new exploration potential in the Gulf, I think Anadarko looks like one of the best ways to play this coming oil boom.
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