BP rose on plans to venture into the Canadian oil sands on Tuesday amid a surge in energy stocks on tight oil inventories and plans by OPEC to hold production steady.

"Our upgrade is essentially a valuation call and is driven by the nearly 11% drop in unit prices since early November despite fundamentals remaining unchanged," Citi said.

Energy sector starts week on a low note.
Oil and gas stocks got off to a shaky start Monday as crude-oil prices fell well below $71 a barrel and the broad market fell 55 points on a negative report on ballooning housing inventories.

The shallow waters of the Gulf of Mexico, once a hotbed for natural gas exploration, are starting to look a little empty. In recent months, dozens of jack-up drilling rigs, which sit atop retractable legs that stand on the seafloor, have shipped out of the area. Left behind is the lowest number of the rigs seen in the Gulf in 28 years.

Industry watchers had expected the jack-up market in the Gulf to be soft in early 2007 after a sharp drop in natural gas prices late last year reduced the incentive to drill. But even when winter cold snaps boosted prices this year, drillers stayed on the sidelines.

Currently, there are 88 jack-up rigs in the U.S. portion of the Gulf of Mexico, down from 106 at this time a year ago, according to ODS-Petrodata, an industry research firm in Houston. Not since October 1979 has the jack-up fleet been as small as it is today, said Tom Kellock, head of ODS-Petrodata's Houston consulting group.

Also here to stay may be sky-high rig insurance rates.

Chron

Early gains across the broad market and merger news in oil services lifted oil and gas stocks Monday, offsetting the impact of weaker commodity prices tugging at the sector.

The professionals most familiar with the so-called oil shortage know there's an estimated 3 trillion barrels under land and sea. That's why they're making their biggest bets in drilling rigs where the scarcity is no illusion.

Oil drillers ``are the most attractive way to go,'' said Don Hodges, who holds about 160,000 shares of Transocean Inc. and about 120,000 shares of GlobalSantaFe Corp. among the $1.1 billion managed by Dallas-based Hodges Capital Management. ``There is a shortage, it takes time to build one and it takes a lot of money. Their earnings are going to go up every year for the foreseeable future.''

Orders for offshore rigs have surged sixfold in the past five years, and rental rates are at the highest ever after oil prices tripled and industry profits soared. The wait for the most sophisticated rigs, which can drill in waters more than a mile deep, is a record three years, and the cost to lease one has quadrupled since 2004, climbing to more than $500,000 a day.

``It's a big problem,'' Ashley Heppenstall, chief executive officer of Stockholm-based oil producer Lundin Petroleum AB, said in an interview. ``There has been a gross underinvestment in the industry for a number of years and we paid for that last year. We had delays in some of our drilling campaigns.'' Lundin plans to sink wells this year in Norway, Russia and Sudan, and has permits to explore in Vietnam, Ethiopia and Congo.

`Most Attractive'
The rise in rig costs contributed to the five-year jump in oil prices by driving up production costs, hindering the discovery of new deposits and slowing the development of existing finds. The oil left underground in the U.S. alone is enough to replace every barrel pumped from Iran for the next 20 years, according to statistics compiled by London-based BP Plc, Europe's second-biggest oil company.

Rising oil prices are braking global economic growth. Each $10-a-barrel increase in crude sustained for a year shaves between 0.4 percentage point and 0.6 percentage point off economic expansion, according to William Murray, a spokesman for the International Monetary Fund in Washington.

Exxon Mobil Corp., BP and the rest of the largest oil producers are being forced to pay more to get the rigs they need to meet the world's ever-rising energy demand. With crude prices above $50 for most of the past two years, investors from Boone Pickens to billionaire John Fredriksen, who controls the world's largest oil tanker company, are betting on drilling companies to outperform producers.

Building Costs
The price to build a deepwater rig has nearly doubled in less than a decade because of rising costs for steel, equipment and shipyard space, according to JPMorgan Chase & Co. analyst David C. Smith.

A new deepwater rig that's capable of drilling in waters 7,500 feet or more costs $525 million to $625 million to build, up from $300 million to $400 million during the late 1990s, according to the Dallas-based analyst.

The shares of drillers are poised to replace oil and gas producers as the industry leaders, Hodges said. The Standard & Poor's 500 Oil & Gas Drilling Index, which includes Transocean, Noble Corp. and Dallas-based Ensco International Inc., is little changed in the past year. A measure grouping producers such as Exxon Mobil and Chevron Corp., the Standard & Poor's 500 Integrated Oil & Gas Index, jumped 22 percent in that time.

The losers are smaller companies that sink wildcat wells in hopes of finding a gusher.

Desire Petroleum Plc, a U.K.-based oil explorer with a permit to drill offshore the Falkland Islands near Argentina, has sought a rig since early 2005. The firm lost 1.68 million pounds ($3.3 million) in its most recent six-month period.

Waiting List
``Enormous shortages of rigs are affecting everybody, from oil majors to companies such as ourselves,'' Ian Duncan, CEO at Desire Petroleum, said in a telephone interview. ``It is difficult to find a rig anywhere.''

The rigs most in demand are known as drillships and semisubmersibles, equipment used in deep waters.

The battle for rigs has intensified as oil producers boost exploration in the Gulf of Mexico, West Africa and Brazil. The number of offshore rigs in West Africa has increased to 56 from 44 a year ago, according to industry analyst ODS-Petrodata. In Asia and Australia, the number rose to 86 from 79.

``It takes three years from when you order a rig until it is delivered, and we haven't seen this before,'' said Martin Huseby Karlsen, an analyst with DnB NOR Markets in Oslo.

Lease rates have soared to a record. Seadrill Ltd., the Norwegian driller founded by Fredriksen, last month said it rented out a rig for an unprecedented $525,000 a day. Contracts in early 2004 were signed for about $125,000 a day.

`Fight for Resources'
``There's a fight for resources in the entire industry, not only rigs,'' Norsk Hydro ASA Chief Executive Officer Eivind Reiten said in an interview. ``That's putting pressure on costs, and may challenge the progress of some of the projects, but my company, Hydro, is fortunate in being well positioned there.'' Oslo-based Hydro is Norway's second-largest oil company.

The number of offshore drilling rigs on order at shipyards, a measure of demand, has jumped to 115 from 18 five years ago, according to ODS-Petrodata. With few rigs yet delivered, the number of offshore rigs operating worldwide is little changed in the past five years, at 657. This has helped push up oil prices to about $61 as of last week from about $25 five years ago.

As oil rose, profit for rig owners swelled. Transocean's net income last year was $1.39 billion, up from $19.2 million in 2003. The stock more than tripled during that time. Noble's net income jumped to $732 million in 2006 from $166.4 million in 2003. Shares of the Sugar Land, Texas-based company doubled.

`Not Concerned'
The retreat in oil prices from the record $78.40 a barrel in July poses no threat to exploration, said Alf Thorkildsen, chief financial officer for Seadrill Management AS, the Stavanger, Norway-based operating arm of Seadrill.

``We're not concerned with oil prices at around $50,'' said Thorkildsen. ``If they go below $30, that's another issue.''

Seadrill is looking at buying competitors to get rigs and workers now and avoid the three-year wait. The biggest acquisition in the industry last year was when Fredriksen bought Norway's Smedvig ASA for $2.4 billion. Seadrill, based in Hamilton, Bermuda, beat out Noble and became the industry's sixth-largest following the purchase. Fredriksen declined to comment for this story.

GlobalSantaFe, the world's second-biggest offshore driller by sales, with 61 offshore rigs, would be a ``perfect fit'' for Seadrill, because of its ``premium drilling fleet and high- quality management team,'' said Alan Laws, an analyst at Merrill Lynch & Co. in New York. Jeff Awalt, a spokesman with GlobalSantaFe in Houston, declined to comment.

Looking Cheap
``If we can justify economically a good acquisition, we have the tools to do that,'' said Seadrill's Thorkildsen. He declined to identify possible targets.

While oil and gas prices rise and fall, rig owners can lock in years of revenue with long-term leases. Houston-based Transocean on Feb. 14 estimated its so-called contract backlog, or revenue expected from existing agreements, was almost $21 billion for the next nine years.

Shares of rig companies are also cheaper than oil companies including Exxon Mobil. Transocean trades at more than 10 times expected earnings, while Noble, the third-largest U.S. offshore oil and gas driller, is at 8.1 times. Irving, Texas-based Exxon Mobil trades at more than 12 times expected profit.

BP Capital LLC, the Dallas hedge fund managed by Pickens, boosted stakes in oilfield services stocks including Transocean and GlobalSantaFe in the fourth quarter, according to a filing with the U.S. Securities and Exchange Commission.

The Risks
Two of the five biggest holdings in the fourth quarter at Touradji Capital Management LP, a hedge fund firm founded by Paul Touradji, a former commodities trader at Julian Robertson's Tiger Management LLC, were Diamond Offshore Drilling Inc., an oil driller controlled by the Tisch family, and Hercules Offshore Inc. Both of the rig owners are based in Houston.

``We're bullish on offshore drillers,'' said Maxime Carmignac, who counts Noble, GlobalSantaFe and Transocean among the $13 billion in assets she helps oversee at Carmignac Gestion in Paris. ``Offshore drillers are cheap, undervalued and less volatile than producers and the commodities themselves, oil and gas. They are sitting on a huge amount of cash flow and may benefit from merger and acquisition activity.''

Expectations are so high the risks from falling short are mounting. Baker Hughes Inc. on Feb. 15 said profit rose less than predicted in the fourth quarter and will trail behind estimates in the current quarter on slowing sales growth in North America. The Houston company's shares that day sank 9.4 percent, their biggest drop since 2001.

Bullish on Drillers
``We no longer think it's a slam-dunk that offshore drillers will outperform the energy industry,'' said Timothy Guinness, chairman of Guinness Atkinson Asset Management LLC in London, who helps manage about $2 billion in energy stocks. ``These stocks have performed very strongly over the last three years and the market knows their order books are very strong.''

Expectations that demand will stay strong have kept Robert Rodriguez, who oversees $10.7 billion at First Pacific Advisors LLC, invested in companies including Ensco. Rodriguez's FPA Capital Fund has nearly doubled the returns of the Standard & Poor's 500 Index over the past five years and says oil will rise because producers aren't finding new reserves fast enough.

``I'm bullish on oil and the oil drillers,'' Rodriguez, chief executive officer at Los Angeles-based First Pacific, said in a telephone interview. ``The era of low-cost energy is over.''