Sounding out the prospects of undersea oil
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Eoin Gleeson Aug 29, 2008
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Seismic ship and equipment makers are in high demand
Brazilian oil giant Petrobras had long suspected that there was a massive undiscovered pool of oil off the country's coastline, but the company had to work hard to find it. When it did finally uncover the eight billion barrels sitting in the Santos Basin last year, the deposit was beneath 7,000ft of ocean, 16,000ft of rock and a 1.2 mile-thick layer of hard salt – pretty well hidden, in other words. So how did Petrobras find it?
The answer is through seismic surveying. A group of tankers dragging sonar equipment 5,000ft below the ocean surface picked up a signal last year. They spent the next two months mapping the size and depth of the deposit, tracking an area the size of Manhattan every six hours. Their success in Brazil meant it wasn't long before seismic trawlers were crawling over suspected subsalt deposits off the West African coast, while Mexican state-owned Pemex began prospecting in the Gulf of Mexico. The seismic market should grow 15% this year alone, say analysts at Lehman Brothers.
In fact, since the discovery there is so much enthusiasm for "subsalt" surveying that seismic firms aren't even waiting to be contracted by oil majors. Multi-client sales (where seismic groups survey promising deepwater areas off-contract and collect data to sell to oil groups) are growing fast. Petroleum Geo-Services, which is picking up contracts in the Santos Basin, is expecting a 75% rise in marine contract revenues this year alone, says Matthew Donovan of Energy Current, an offshore energy news service. Seismic groups are nearly booked out for the year ahead. Surveyors are ordering more ships from European shipyards and upgrading fleets to gear up for technically challenging deep-water explorations. The global seismic vessel fleet is expected to grow by 30% in the next 18 months to meet demand, says Dahlman Rose analyst Neal Dingmann – great for seismic ship and equipment makers.
Onshore, too, seismic survey activity has grown. As oil-shale developers such as Chesapeake Energy and XTO Energy rush to unearth the natural gas sitting beneath the clay and the mud of the American Midwest, they have employed seismic groups to sound out the exact quality of the hydrocarbons underfoot. Trucks carrying metal plates that are shaken to generate seismic pulses collect data from the sound waves that return to the surface. When weather or permit disputes don't hold up operations, "the results have been as explosive as the dynamite once commonly used to perform seismic acquisition", says Toby Shute on Motley Fool. Dawson Geophysical, the dominant American onshore seismic group, beat analysts' estimates of quarterly earnings by more than 10% last month.
But it's offshore where seismic groups will be most busy in coming years. Oil is slipping from this year's $147 peak, but with the oil industry needing about $6trn over the next 25 years to finance oil and gas projects (according to Cambridge Energy Research Associates), explorers will need all the help they can get to reach remote deposits cheaply and efficiently. That means the seismic firms should be kept very busy. We have a look at the top seismic group trawling the Santos Basin below.
CGG Veritas shows the way with high-end seismic data gathering
"From land to sea, CGG Veritas (NYSE:CGV) has global oil and gas explorers pretty well covered," according to Toby Shute of Motley Fool. The seismic data group is the biggest player working off the cost of Brazil and has one of the largest marine fleets in the world – mostly working at the high end of the market, measuring reserve volumes over time. Veritas' backlog stands at $1.7bn, well beyond that of its closest competitor, Petroleum Geo-Services.
But what really separates this company from its peers, says Morningstar's Stephen Ellis, is that it owns one of the world's leading seismic-equipment manufacturers, Sercel. Sercel controls 60% of the market, and will provide both crew and equipment for onshore and offshore seismic surveys, says Ellis. With high-end ship fleets expanding and its multi-client sales picking up, the company just recorded a 35% jump in quarterly earnings growth.
And there is plenty more work to do in the Brazilian Tupi oil field. The company, which is now tracing the perimeter of the field, discovered last month that it might in fact be connected to another large oil deposit close by. The firm trades on a reasonable-looking forward p/e of 9.8, and Lehman Brothers sees a 47% upside for the stock from here.
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