Is Shallow-Water Drilling Poised for a Comeback?

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As we've seen onshore, technology is making it possible to generate profits from oilfields previously considered mature, or tapped out. The shallow waters of the Gulf of Mexico are proving to be no exception, as companies utilize advancements in drilling and seismic technology to pump a surprising amount of oil out of a region previously left for dead.

Crazy like a fox
When SandRidge Energy (NYSE: SD) announced its acquisition of Dynamic Offshore Resources in February, its share price dropped 10%. What was SandRidge, an onshore company with no offshore drilling experience to speak of, doing buying a shallow-water driller in a mature field, analysts wondered.

CEO Tom Ward stressed that the company picked up Dynamic's assets on the cheap, for $1.275 billion, which was less than the estimated $1.9 billion value. The assets are 50% oil, and Ward is confident that production will fund its onshore drilling endeavors.

But SandRidge may have been onto something. Since January of last year, shallow-water rig contracts are up 32% in the Gulf. Ten permits to drill new wells were issued in February alone.

Majors are there, too
The big players aren't going to pour a ton of additional resources into developing the shallow end of the Gulf, but the ones that are already there will certainly take advantage. Chevron (NYSE: CVX) chalked up 4.5% of its total output to the region last year.

As is the case with SandRidge, many of these larger outfits treat their shallow water Gulf operations as a slush fund for other projects. Apache (NYSE: APA) produced 14% of its global volume there last year, and used the cash on exploration initiatives, acquisitions, and paying down debt -- three actions crucial to overall success and increasing shareholder returns.

Big winner
Fellow Fool Travis Hoium didn't care for Hercules Offshore's (Nasdaq: HERO) strategy of adding more rigs to the Gulf of Mexico last June. Hercules has the largest presence in the shallow waters of the Gulf, with 18 of its 34 rigs drilling there right now. Though Travis' concerns about shallow-water reserves and Hercules' balance sheet are valid, if there was ever a time for things to turn around, it is now.

Oil prices sitting above $100 and improved seismic technology have enabled companies to increase production in aging fields. Energy XXI (Nasdaq: EXXI) picked up ExxonMobil's shallow Gulf assets in 2010 and has been able to draw 40% more oil out of them in that time. The company is not alone in its success. Renewed industry interest has driven Hercules' daily rates to twice what they were a year ago.

Foolish takeaway
The shallow waters of the Gulf of Mexico are not the next Bakken Shale, but they are also not the curse of death investors once pegged them to be. The high price of oil is keeping the shallow-water drilling industry afloat for now, but the companies above aren't the only ones to benefit. Take a look at three more stocks Fool analysts believe will make a killing on high oil prices.

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