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Energy Roundup: Key Drivers of Gulf of America Oil Production Resurgence · WTR Small-Cap Spotlight

• 0:00
  SPEAKER_02: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_02: I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research.
• 0:11
  SPEAKER_02: Today I'm joined by my Water Tower Research colleague from our natural resources team, Richard Tullis, and I'm also joined by Al Petrie, founder and senior partner at Al Petri Advisors.
• 0:21
  SPEAKER_02: The resurgence of oil production in the Gulf of America was a widely discussed topic during the recently concluded Louisiana Energy Conference, which was founded by Al and is proudly sponsored by Watertower Research.
• 0:34
  SPEAKER_02: We have brought Richard and Al together today to provide some thoughts on the evolution of the energy operations in the Gulf of America.
• 0:41
  SPEAKER_02: Good morning, Jensen.
• 0:42
  SPEAKER_02: Thanks for joining me.
• 0:43
  SPEAKER_01: Good morning, Tim.
• 0:46
  SPEAKER_02: Richard, to start things off, tell us about your history working with and for offshore focused energy companies.
• 0:53
  SPEAKER_01: Sure.
• 0:54
  SPEAKER_01: By way of background, during my 16 years as an energy equity research analyst, I always had a soft spot for offshore exploration operations.
• 1:03
  SPEAKER_01: Much of that affection likely stems from my 10 years spent working with Texaco since the Gulf of America was part of the division that I worked in.
• 1:11
  SPEAKER_01: And the company was drilling in the deep water even more than 25 years ago.
• 1:15
  SPEAKER_01: While working as an energy research analyst, I had the opportunity to initiate coverage on about 10 EMP companies focused on offshore operations, including companies that are still active in the Gulf of America today, such as WT Offshore and Talos Energy.
• 1:32
  SPEAKER_01: But presenting investment ideas to institutional investors, I always viewed expiration companies as a way for investors to possibly add a differentiator in their portfolio.
• 1:44
  SPEAKER_01: At that time, the typical investor, institutional investor, simply held many of the go-to shale focused energy stocks.
• 1:53
  SPEAKER_01: Although investors would occasionally suffer an unsuccessful expiration well, the lack of severance taxes and a very reasonable offshore production royalty rate helped offset the unsuccessful well expense.
• 2:07
  SPEAKER_01: Current Gulf of Mexico royalty rates are in a 12.5% to 17% range, and there is no production tax compared to the Permian, where many leases have a 20 to 25% royalty rate in addition to a 5-7% production tax.
• 2:24
  SPEAKER_02: That's a great overview.
• 2:26
  SPEAKER_02: Could you also take us through the energy evolution in the Gulf of America that has resulted in the Gulf's oil production recently reaching all-time highs?
• 2:35
  SPEAKER_01: Sure, Tim.
• 2:36
  SPEAKER_01: Although offshore Gulf of America drilling dates back to the late 1930s, the initial well there was drilled about a mile offshore, the Louisiana coast in 14 feet of water.
• 2:47
  SPEAKER_01: Deepwater Gulf of America, generally considered in water depths of at least 1,000 feet, did not commence until Shell drilled its cognac well in 1975.
• 2:57
  SPEAKER_01: And that was in about 1,023 feet of water.
• 3:01
  SPEAKER_01: So deep water oil production didn't start to take off until the late 1990s, early 2000s, after the first spar platform was installed in 1996 and nearly 2,000 feet of water depth in this floating hull helped prove that these platforms could support both drilling and production facilities in harsh deep water environments.
• 3:22
  SPEAKER_01: The latest breakthroughs that helped push Gulf of America oil production to the current record, 2 million barrels a day level, include three key drivers.
• 3:31
  SPEAKER_01: One, the introduction of 20K PSI technology.
• 3:36
  SPEAKER_01: So the deployment of the 20,000 PSI pressure systems is the biggest leap forward for the region, allowing operators to drill deeper into the earth in search of hydrocarbons where pressures are extreme.
• 3:48
  SPEAKER_01: The prior technology allowed drilling up to about 15,000 PSI conditions.
• 3:53
  SPEAKER_01: So this new specialized equipment that also must tolerate temperatures exceeding 350 degrees Fahrenheit includes subsea production systems and blowout preventers, also capable of handling at least 20,000 PSI in the 350 degree Fahrenheit temps.
• 4:11
  SPEAKER_01: For some examples of the recent development in this area, Anchor Field, the Chevron, launched its its uh first deep water 220K project in the Gulf of America, located about 140 miles off the Louisiana coast in 5,000 feet of water with a targeted reservoir 34,000 feet below sea level.
• 4:32
  SPEAKER_01: The$5 billion project started production in August 2024 with a facility design capable of uh 75,000 barrels a day of production.
• 4:43
  SPEAKER_01: Next, uh Casquita and Tiber at Guadalupe, that's the BP sanctioned uh projects.
• 4:49
  SPEAKER_01: Both of these are multi-billion dollar Gulf of America projects that will utilize ultra-high pressure and temperature technology with first production from these projects expected at the end of the decade 2029-2030.
• 5:04
  SPEAKER_01: The second big um innovation recently in the Gulf of America is the greater use of subsea tiebacks.
• 5:11
  SPEAKER_01: So companies are significantly extending the operational lifespan of older facilities by connecting new, newly discovered smaller reservoirs to existing production hubs.
• 5:22
  SPEAKER_01: As an example here, last year Chevron completed the tie back of its Valymore project, three miles to the to its existing blind faith facility.
• 5:32
  SPEAKER_01: Then lastly, it's the regulatory environment.
• 5:36
  SPEAKER_01: The industry has benefited from regulatory milestones, including federal approvals for deep water megaprojects, which are expected to support production and long-term hydrocarbon exports.
• 5:48
  SPEAKER_01: It's also worth noting that the Gulf of America is home to some of the world's lowest carbon intensity oil and gas production.
• 5:56
  SPEAKER_01: And that's partly due to standardized offshore platform designs with and then operational efficiencies that are aided by what are high sustained flow rates per well.
• 6:08
  SPEAKER_02: So um I'd be most interested rather to see if you can juxtapose for our listeners um the rates of return comparing a Gulf of America deepwater well to, say, a Delaware basin well package.
• 6:21
  SPEAKER_01: That's a great topic, Tim.
• 6:22
  SPEAKER_01: And a recent study comparing a$350 million deep water subsea tie back well and completion to a 35 well program in the Delaware basin also costing about$350 million in total.
• 6:37
  SPEAKER_01: Found that the two projects had similar oil production over the initial 20 years.
• 6:41
  SPEAKER_01: So it'd be about 23 million barrels of oil for the deepwater well compared to about 22 million barrels for the Delaware basin, 35 well package.
• 6:50
  SPEAKER_01: Over 20 years, the deep water well's flatter decline curve begins to give it a little bit of an advantage with an estimated total production of about 32 million barrels, while the Delaware package would produce about 30 million barrels, so about a 2 million barrel differential there.
• 7:07
  SPEAKER_01: On a cumulative cash flow basis, is really where the Gulf of America deepwater well starts to dominate with estimated net cash flow of about 1.1 billion versus about 500 million for the Delaware package.
• 7:22
  SPEAKER_01: So this wide gap is partly due to the typically higher oil production cut in the Gulf of America, coupled with generally a lower operating cost per barrel, and also due to the lower royalty rate and zero production tax in the Gulf that I mentioned a little bit earlier.
• 7:39
  SPEAKER_02: That's a huge differential to state the obvious.
• 7:42
  SPEAKER_02: So before I turn over to Al Petrie for a couple of questions, um, Richard, what has impressed you most about the Gulf of America energy resurgence over the past several years?
• 7:52
  SPEAKER_01: Tim, I would I would have to say what most stood out is the surprising fact that the Gulf of America is starting to outpace the entire lower 48 states in oil production growth beginning last year, and that is expected to continue this year.
• 8:07
  SPEAKER_01: According to Wood Mackenzie, the lower 48 oil production is estimated to remain flattish this year.
• 8:12
  SPEAKER_01: Well, the Gulf of America is projected to grow about 200 to 300,000 barrels per day.
• 8:18
  SPEAKER_01: That's partly due to lower 48 oil plays having already drilled up many of the most prolific areas and now contending with drilling more second-tier acreage.
• 8:28
  SPEAKER_01: Remember, the first big oil plays in the U.S.
• 8:32
  SPEAKER_01: came into existence more than 10 years ago.
• 8:35
  SPEAKER_01: The Chevron CEO said just three months ago that shale oil production in the U.S.
• 8:40
  SPEAKER_01: has probably plateaued over the past six to 12 months.
• 8:43
  SPEAKER_01: And this is in a time when the Chevron CEO also said that we live in an era when tools and capabilities of technology have never been better than they are today.
• 8:55
  SPEAKER_02: Al, I'd love to get your state of the Gulf of America perspective.
• 8:58
  SPEAKER_02: So kicking things off, could you please provide an overview of your experience, including your time as an IR executive at an energy company and later as the founder of Al Petri Advisors?
• 9:09
  SPEAKER_00: Sure, Tim.
• 9:09
  SPEAKER_00: I've been active in investor relations since actually about 1987.
• 9:13
  SPEAKER_00: The first 10 years I was with an EMP company, LLNE, that was based in New Orleans.
• 9:18
  SPEAKER_00: It had worldwide operations.
• 9:21
  SPEAKER_00: It's almost like a mini-major, to tell you the truth.
• 9:23
  SPEAKER_00: And it also included Gulf of America production.
• 9:26
  SPEAKER_00: So that's how I initially got my uh kind of indoctrination with the Gulf.
• 9:31
  SPEAKER_00: Uh, when that company was acquired by Burlington Resources, I was named head of IR for them and continued there until 1998 when I formed my own IR consulting firm.
• 9:41
  SPEAKER_00: And since then, we have probably consulted with over 100 companies with pretty much every one of the ENPs on the Gulf over those years.
• 9:49
  SPEAKER_02: Impressive background.
• 9:50
  SPEAKER_02: Um, so Al, are you noticing increased investor interest in offshore explorers and operators compared to several years ago?
• 9:57
  SPEAKER_02: And what are you hearing from investors regarding offshore companies at the moment?
• 10:01
  SPEAKER_00: Yes, uh we have seen significant increased interest in the Gulf.
• 10:05
  SPEAKER_00: We've always had uh Gulf of America producers and all service companies on our conference, but we have definitely seen broader interest in recent years.
• 10:13
  SPEAKER_00: I recall a few years ago, one of our buy-side attendees said, you know, why do we bother having Gulf firms since investors only cared about shale?
• 10:22
  SPEAKER_00: Well, it's interesting that a few years later that same investor came back and said, Ow, you need to further expand your offshore operations because people really care about that now.
• 10:30
  SPEAKER_00: So we now dedicate a full half day to offshore discussions, and they are among our best attended sessions.
• 10:37
  SPEAKER_00: So I think investors are beginning to better understand conventional reservoirs that have continued to uh contributed to the growth that uh Richard mentioned earlier versus shale that seemed to be reaching a plateau.
• 10:50
  SPEAKER_02: A question I like to ask you every year is kind of a uh, shall we say, a post op uh debriefing is uh what were some of the key energy themes discussed this year at the Louisiana Energy Conference?
• 11:01
  SPEAKER_00: Sure.
• 11:02
  SPEAKER_00: I I think probably the most common topic that was discussed was how would producers react to higher oil prices.
• 11:09
  SPEAKER_00: I think the consensus at the time of the conference was that oil prices were expected to be reset at a higher level in the medium term because of the major supply disruption, but not likely to stay above$90 at least for very long.
• 11:23
  SPEAKER_00: So most of the smaller producers said they were being very cautious and overreacting to the sharp increases in prices and were looking to use the added cash flow to strengthen our balance sheet.
• 11:34
  SPEAKER_00: Now, taking the Gulf of America, which is a little different, those investments are much longer term to execute and because of their size are not as sensitive to short-term volatility.
• 11:45
  SPEAKER_00: So all price changes don't really affect those uh uh types of projects as we have seen them continue to come on stream, even with some of the volatility we've had in the past.
• 11:57
  SPEAKER_00: And it's international investments are probably similar uh focused with the longer term.
• 12:03
  SPEAKER_02: Very interesting.
• 12:04
  SPEAKER_02: And uh what are you seeing as far as new entrants and consolidation in the Gulf, Al?
• 12:09
  SPEAKER_00: Yes, we have definitely seen increased interest in the Gulf by large international companies.
• 12:15
  SPEAKER_00: You know, uh with the recent projects that Richard mentioned, large firms have seen the upside potential from deeper and highly prospective opportunities and are looking at it for further growth, particularly in the long term.
• 12:27
  SPEAKER_00: And a good example of that was the acquisition of a uh New Orleans area private company called Log Exploration, which was a large and highly successful deep water company that was acquired by Harbor Energy, which is a large international firm based in London.
• 12:43
  SPEAKER_00: They had expressed for several years they were very interested in getting into the US, and the Gulf was a perfect opportunity, and Log was just the right candidate for that.
• 12:53
  SPEAKER_00: So we have seen uh the majors as well being active in expanding their operations, as you've heard from BP and Shell and from others who are expanding their deep water activities.
• 13:06
  SPEAKER_02: Okay, and then uh just kind of as a follow-on, anything new and exciting on the MA front beyond that that you see either like real time or on the horizon?
• 13:15
  SPEAKER_00: Yes, you know, as you look back, I I think the majors who made some of the large discoveries in the shallow water Gulf of America, like Richard was talking about, and I called uh those are now considered what I say midlife uh assets.
• 13:30
  SPEAKER_00: So uh the majors have had started to sell those properties over the last several years.
• 13:36
  SPEAKER_00: And some good examples was WT offshore acquiring Mobile Bay from Exxon and Cantium buying Bay Marchand from Sherbrock.
• 13:44
  SPEAKER_00: So what was happening is that those majors were saying, okay, we've got deeper water projects that have much more upside potential.
• 13:53
  SPEAKER_00: We have these other assets that are still good, but they're kind of in the middle of their life.
• 13:58
  SPEAKER_00: It's probably time for us to sell those to smaller companies who will get more out of it than they could, so it's much more meaningful.
• 14:05
  SPEAKER_00: And I think we're starting to see that with the deep water assets that some of those initial ones uh that were pre-20K uh type uh projects, like Richard mentioned as well, that those are now coming into the market for the smaller companies.
• 14:21
  SPEAKER_00: And in fact, just yesterday, after the market, uh Talus announced that they were acquiring some deep water properties from Shell.
• 14:29
  SPEAKER_02: Great.
• 14:30
  SPEAKER_02: Well, thanks for those valuable insights, Al.
• 14:32
  SPEAKER_02: And uh, I'm gonna pivot back to Richard as we wrap up to ask uh what do you see as the next chapter in the Gulf of America's energy development?
• 14:39
  SPEAKER_02: Richard.
• 14:40
  SPEAKER_01: Tim, I believe the next chapter would certainly include further testing and development of the Paleogene Formation and the Wilcox inboard trend, where Chevron's anchor project is located, and mainly the area we talked much about today, and which helped crack the code via its application of the industry-leading high-pressure and high-temperature deep water technology, and that allowed the uh company to target and develop previously difficult access resources and should enable similar deep water high-pressure developments for the entire industry.
• 15:12
  SPEAKER_01: The Anchor project was 10 years in the making.
• 15:14
  SPEAKER_01: And given that the discovery was in 2014 and the company spent about$5 billion in the development, I think the second producing project in the Gulf, well, it is the second producing project in the in the Gulf in the 20,000 uh PSI, Wilcox inboard trend, is Beacon's offshore um Shenandoah project that started production last summer.
• 15:39
  SPEAKER_01: So now things are starting to get going, especially since Chevron's anchor wells are outperforming initial expectations.
• 15:46
  SPEAKER_01: The next expiration well in the Paleogene um formation, the one we want to watch, will be the BP conifer well that is expected to spud later this year.
• 15:56
  SPEAKER_01: It could ultimately be tied back to another BP project called Casquita, where first oil is targeted there in 2029.
• 16:04
  SPEAKER_01: In the end, we believe there's still lots of running room remaining in the Gulf of America overall, and particularly in the Paleogene play.
• 16:13
  unknown: Great.
• 16:13
  SPEAKER_02: Well, thanks for those comments, Richard and Al.
• 16:16
  SPEAKER_02: Great to see you as always and know that you always have an open invitation if there's any exciting uh industry news that we should talk about on here.
• 16:22
  SPEAKER_00: Very good.
• 16:23
  SPEAKER_00: Thank you, Tim.
• 16:24
  SPEAKER_00: Always great catching up.
• 16:26
  SPEAKER_02: Thank you for listening, and don't forget to subscribe as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 16:42
  SPEAKER_02: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 16:47
  SPEAKER_02: Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.