The central Gulf of Mexico Lease Sale 205 secured the largest total revenue for lease sales in close to a quarter-century-almost $3 billion in high bids.

That's more interest shown than in the Central Gulf sales this decade combined-and the most revenue outlay since 1983's watershed mark of $3.4 billion-says Colin Gerry, research analyst for Raymond James & Associates in Houston.

About 40% of the bid tracts are in ultradeep water-more than 5,000 feet-and accounted for more than half the total revenues plunked down. The big spenders were Royal Dutch Shell and Chevron, which on a combined basis won 113 tracts costing more than $800 million.

Comparatively, the average value paid for tracts in the jackup-dominated, shallow-water Gulf of Mexico remained relatively flat with the average for the past three years, "which makes sense given the uncertainty in near-term natural gas prices," says Gerry.

The big takeaway from this lease sale: The market's belief in the sustainability of higher oil prices, the analyst contends.

However, another possible reason for the huge uptick in deepwater spending this year could relate to Chevron's well-publicized success last year with its more than 28,000-foot deepwater Jack well discovery, which culminated in a flow-rate test of 6,000 barrels of oil per day.

"This event proved that the industry had the technology to go after ultra-deepwater fields and that the hydrocarbon payout potential exists," says Gerry. "As a result, bidding activity on deepwater leases exploded this year. In fact, the block with the highest number of bids and the highest price paid for a winning bid [in this lease sale] is in Walker Ridge-the very region in which the Jack well was drilled."

The analyst adds that the firm remains bullish on deepwater drillers as strong long-term oil fundamentals are clearly pushing higher deepwater interest, as illustrated by Sale 205. "On average, Transocean (Strong Buy), Diamond Offshore (Outperform), GlobalSantaFe (Strong Buy) and Noble Corp. (Strong Buy) are trading at attractive valuations of nine times estimated 2008 earnings per share."

However, in a recent JPMorgan joint E&P and offshore oil-services report, David Smith, a Dallas-based oil-service analyst, took some issue with this sanguine outlook for deepwater drillers.

"While Gulf of Mexico deepwater drillers are beneficiaries of strong deepwater bidding, we believe their upside is limited on light volume growth, market fragmentation and a ceiling on deepwater-rig pricing," says Smith.

"We prefer deepwater-levered names with stronger growth profiles and market concentration such as FMC Technologies and Cameron International (subsea production and processing), Oceaneering International (remotely operated vehicles and subsea hardware) and Hornbeck Offshore Services (deepwater supply and service vessels)."

Brian Kuzma, Houston-based E&P analyst for JPMorgan, notes that among independents, Mariner Energy, Noble Energy and Devon Energy each won several blocks in the lease sale that were competitively bid upon by four or more companies.

"Historical evidence suggests that competitively bid blocks have significantly higher success rates, discovery sizes and profitability," he observes.

Kuzma adds that the interest from the majors exhibited in Sale 205 could indeed be good for large-cap E&P companies that are looking to sell deepwater prospects or their entire company.

That said, he offers a cautionary note. "Long term, there appears to be more competition squeezing all phases of the deepwater-development cycle including prospect generation, acreage, rigs and infrastructure-and that's bad news for companies like Anadarko Petroleum, Devon Energy and Noble Energy which are counting on the deepwater for their growth."

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