The crash in oil prices has taken a steep toll on oil drillers, but only if you look carefully. At first glance, it would seem that the massive decline in WTI crude—from over $100 per barrel at its 2014 peak, to a low of $26 per barrel in 2016—would punish oil drillers indiscriminately. But that’s not necessary the case; rather, while onshore shale drilling has seen a big drop-off in activity, deep water drilling remains relatively intact.

For example, according to the most recent rig count data from oilfield services firm Baker Hughes (NYSE: BHI) U.S. rig counts declined by another 12 rigs in the week ended Mar. 24, to 464. To put the decline in context, in the same week one year ago, there were 1,048 rigs in operation. That amounts to a 55 percent decline in rigs in the span of one year.

Looking closer, the biggest draw-down has taken place in onshore rigs. Land rig counts are down 57 percent over the past one year, while the Gulf of Mexico has seen a relatively modest 18 percent decline. Even outside the Gulf, in other deep-water fields around the world, Big Oil continues to plow full-speed ahead—here’s why.

 

Economics of deep-water drilling remain favorable

Many of the world’s biggest super-majors have made the Gulf, and deep-water drilling in general, a key strategic priority. This has led to a significant increase in Gulf oil production over the past five years.

One of the most active companies in deep-water drilling is European integrated giant Royal Dutch Shell (NYSE: RDS.B). On Mar. 14, Shell announced it has started production on the third and final phase of operations in offshore Brazil. Shell is the operator of this development and holds a 50 percent stake in the Campos field offshore Brazil. This exposure is the result of Shell’s acquisition of BG Group.

Shell has a joint venture with fellow European major BP plc (NYSE: BP). BP operates the large Mars development in the deep-water Gulf of Mexico. Royal Dutch Shell holds a 71.5 percent interest in the Mars B program, with BP operating the remaining 28.5 percent of the project. The potential of the project is very promising. Shell believes its infrastructure upgrades can extend the life of the Mars project to 2050 or beyond. In terms of production, the goal is for the Mars platform to reach a peak of 100,000 barrels of oil equivalents per day this year. First oil production began in Feb. 2014 from the Mars B development through Olympus, Shell’s largest, floating deep-water platform in the Gulf of Mexico. Combined production from Olympus and Shell’s original Mars platform is expected to reach 1 billion barrels of oil equivalent.

The reasons for this are fairly clear. Supplies are abundant in deep-water fields such as the Gulf and offshore Brazil. In fact, the Gulf of Mexico is one of just a small handful of oil fields in the U.S. that is capable of producing in excess of 1 million barrels of oil per day. Furthermore, technological advancements in deep-water drilling have made these supplies more accessible. For example, Transocean (NYSE: RIG), one of the biggest oil rig companies in the world, has a specialized fleet of deep-water rigs that they built specifically for accessing oil at unprecedented depths. It has 28 ultra-deep water rigs in its fleet.

As the above chart demonstrates, companies have not felt compelled to reduce production of offshore oil, particularly in the Gulf of Mexico, even with falling oil prices. Most of the world’s super majors, including Shell, BP, and others, fully intend to continue ramping up production of offshore oil. The takeaway for investors is that offshore production will go a long way in helping the integrated majors’ stated goals of covering their dividends with underlying free cash flow as soon as next year.

 

Companies to watch

* Chevron (NYSE: CVX): In addition to Shell, Chevron has made significant investment in deep-water drilling, particularly in the Gulf, where it has a major project called St. Jack/Malo. This project is crucial to Chevron’s goal to reach 3.1 million barrels per day in total production by 2017. But abnormally high costs threaten the viability of deep-water Gulf drilling, as oil at extremely low depths is not easy to get to. That has made efficiency a priority. Chevron recently announced that it improved drilling efficiency by 30 percent at Jack/St. Malo.

* BP (NYSE: BP): It might be shocking to hear that BP could be active in deep-water drilling in the Gulf of Mexico, considering just six years ago BP was responsible for one of the worst oil spills in U.S. history there. But BP is back to business in the Gulf, in a big way. BP is the leading acreage holder in the deep-water Gulf, with ownership in around 600 leases.

Disclosure: The author is long BP

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance