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Offshore Drilling: Look, Before You Go Deep

President Obama opened a new era of offshore drilling this week, but there are as many oil slicks as energy-stock upticks in the offshore-drilling policy sea-change.

(Energy winners story updated for closing prices, Gulfport Energy news)NEW YORK (TheStreet) -- It's about time for Easter egg hunting, but a bigger hunt is getting underway for precious oil and gas assets located offshore in the outer continental shelf of the U.S.

A new era of U.S. offshore oil exploration began on Wednesday, and

offshore drilling stocks rallied.

Offshore drilling stocks continued their rally on Thursday.

ENSCO International


was leading returns on Thursday, up 4.8%. Ensco's two-day gain on Wednesday and Thursday had added just under $3 to its stock price, to $46.91 at the close on Thursday.

Diamond Offshore Drilling

(DO) - Get Diamond Offshore Drilling, Inc. Report

was up 2.5% on Thursday, to $91.01. Diamond's two-day share price gain was $4.50 above the share price it was trading at before Department of the Interior Secretary Ken Salazar and President Obama declared the outer continental shelf of the U.S. back in the oil and gas exploration business.


(RIG) - Get Transocean Ltd. Report

, with the hardest-to-beat ticker symbol among offshore oil drillers, was up close to 3% on Thursday, to $88.77. Transocean's two-day gain was above just under $4 a share.

In fact, the biggest pop of all among oil and gas exploration stocks on Thursday was unrelated to the price of oil rising above $85, or the news from Washington D.C.

Gulfport Energy

(GPOR) - Get Gulfport Energy Corp Report

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spiked 20% on speculation that its stake in a Canadian oil sands company could fetch a high value in a future initial public offering.

Of course, oil and gas exploration is a high-risk business, and not surprisingly, there were some significant stock pops in some of the more speculative oil and gas sector drilling players.

Hercules Offshore


got off to a quick start on Wednesday, up 6% right after the White House announced its intention to open up offshore reserves. Analysts say that highly leveraged Hercules is more like an option than an equity play.

Nevertheless, investors seemed to come to their senses regarding the vague potential from the sea change in offshore energy, and Hercules ended Wednesday only up 3 cents, to $4.32, and was up by 1.4% on Thursday, to $4.38.

Vantage Drilling


was up 2.7% on Thursday, but 3% of the $1.52 drilling stock represented a gain of 4 cents.

There's a much larger issue related to risk and offshore potential than the most speculative of the drilling stocks. History provides ample evidence of why investors should retain a healthy level of skepticism about the offshore energy assets.

In the Georges Bank area of the North Atlantic, for example, energy company consortiums drilled in 1976 and 1977 to gain geologic information prior to offshore Federal petroleum exploration leasing. After leases were awarded, eight industry exploration wells were drilling between 1981 and 1982. Energy companies forked over more than $816 million dollars for the offshore tracts.

The rewards? As noted in a report from the Department of the Interior in 2000, "None of these

Georges Bank wells encountered significant concentrations of oil or natural gas, and drilling has not resumed since 1982."

With that cautionary tale in the rearview mirror, the new offshore drilling, it must be noted, is slated for the mid-Atlantic. The Department of the Interior estimates that the area off the coast of Virginia "conservatively could contain 130 million barrels of oil and 1.14 trillion cubic feet of natural gas."

Investors should also remember that the timeline for much of the offshore assets housed within the new federal policy are not even up for lease sale in the next five years. It is only the mid-Atlantic offshore leases included in the first of two five-year plans announced by President Obama. Potential offshore drilling in the Eastern Gulf of Mexico and the Alaskan areas of Beaufort Sea and Chukchi Sea would not even be put under consideration until the 2012-2017 five year plan.

Interior estimates that 39-63 billion barrels of oil and 168-294 trillion cubic feet of natural gas are economically recoverable from the eight areas under consideration for the second five-year plan.

When it comes to risk, investors would be wise to remember that the environmental lobby will have something to say about this about-face by the Democratic party and President Obama on a long-standing moratorium on offshore drilling.

Whales won't be the only ones whose tops blow over the issue of offshore drilling in the mid-Atlantic, eastern Gulf of Mexico, and Alaska. The Department of Interior received 102 comment letters from environmental and other related interest organizations about the proposal. The Sierra Club and other powerful environmental lobbies were out quickly with positions staunchly against President Obama's proposal.

Still, the Democratic Party is trying to position the oil and gas industry carrot as a politically Machiavellian means of attaining the larger goal of comprehensive energy policy including carbon cap and trade legislation.


Obama has already embraced nuclear energy, and even

major wildlife advocacy groups have said that the real politik of U.S. energy policy demands a comprehensive solution -- clean energy cannot shut out conventional energy means.

Still, there's so much interest being mucked up for offshore energy as an investment in the past 48 hours, the example of Mukluk Island, Alaska, might be worthwhile to remember also.

Everyone within the energy industry knows about Mukluk's ill-fated history. Should you know about it too?

Mukluk Island is located in the Beaufort Sea area that the Obama Administration has put under drilling consideration for the 2012-2017 offshore drilling plan. In 1984, optimistic preliminary analyses indicating the possibility of a major discovery led oil companies to collectively invest $1.5 billion in federal leases on the Mukluk area exploration.

A test well drilled nearly 10,000 feet through the sea's floor brought up salt water with only traces of oil -- it had all leaked away to other areas of the sea before the drill was active. Mukluk is today an abandoned site. Companies like Dallas-based Diamond Shamrock wrote off close to $200 million on the big Mukluk disappointment.

One oil industry executive told TheStreet on Thursday, "Mukluk was going to be a sure thing, and now it's called a billion dollar dry hole."

Of course, energy optimists say that drilling technology has gotten much better since the murky Mukluk days. The oil industry executive said, "Mukluk was hugely expensive, and drilled with the best available technology of the time. Everything was perfect, and we knew exactly where the oil was, except the oil had leaked out. Technology has improved, but you still have to drill," the energy executive said.

For investors, there are plenty more layers to drill through before going deep into your own personal investment portfolio Mukluk-equivalent.

For everything you ever wanted to know about U.S. offshore oil and gas resources and leasing, but never knew to ask before Wednesday, the U.S. Department of the Interior's Minerals Management Service web site ( is a good place to start.

-- Reported by Eric Rosenbaum in New York.


>>Energy Winners: Gulfport Energy

>>Offshore Oil Drillers: Energy Winners

>>Obama Goes Nuclear to the Tune of $8 Billion

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