- Summary: The free market is working. As oil prices climbed, companies were willing to spend more on oil exploration. So far the results are impressive. Earlier this month Chevron (CVX), Devon (DVN) and Statoil (STO) announced the discovery of “Jack”, a huge oil field five miles beneath the Gulf of Mexico. Even though Jack won’t be on-line for a few years, oil prices have been sliding since the announcement. Drilling deeper, while expensive, is the new frontier in oil exploration. Almost half of the oil fields coming on-line in the next four years are at least 2,500 feet deep. A consequence of all this deep drilling activity is that there is not enough deep drilling equipment to satisfy current demand, causing prices to skyrocket. Exploration equipment companies are responding by accelerating their construction of new floating rigs (23 under construction) and drill ships (6 under construction). Increasing the available supply of oil should not be a problem - "Oil prices could get cut in half and the economics of these projects would still be attractive," noted analyst C.K. Poe Fratt, who covers drilling rigs for A.G. Edwards & Sons.
- Comment on related stocks/ETFs: Earnings are expected to double at the four companies whose specialty is leasing deepwater rigs. While the consumer will be happy about falling gasoline prices, a rapid decline in oil prices can have negative implications for the U.S. economy.
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Source: Jack Goes Deep and Scores