These Three Deep Sea Drillers Look Like a Bargain 27 comments
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Fundamentally we know that the world thirst for oil is going up. It will continue to go up in the future because the strongly growing economies of India and China will drive that price up.
An earlier Seeking Alpha article noted that India and China both consume less than 2 barrels of oil per person per year. The U.S. consumes approximately 26. The Western European countries and other developed countries consume 13-15 barrels per person per year.
Furthermore both China and India are subsidizing the price of oil for their citizens. Increased usage by these quickly growing economies seems certain. If China's and India's use goes up by just one barrel per person, this will have a huge impact on the global supply of oil. They both have huge populations. The price will rise with the increased demand.
This all seems virtually inevitable now. In the long term, alternate forms of energy seem to be the solution. However, in the short term the world is stuck with oil as a staple. Since the world will not change quickly away from oil, what else can it do? The answer is simple, it must produce more.
How can it do this? The land based oil fields seem to have been tapped to a large extent. The new "land based" discoveries that are made do not even seem to keep pace with the "land based" fields that are expiring. The most promising fields these days seem to be the sea or ocean based fields. Prominent discoveries have been made in the Gulf of Mexico, off Brazil's coast (the Tupi and other fields), in the China Sea, off Malaysia and Indonesia, in the North Sea, etc. This means the short term solution (i.e. for the next 5-10 years at least) is deep sea drilling for oil.
Three excellent companies in this area are Transocean (RIG), Diamond Offshore Drilling (DO) and Noble (NE). They all have good numbers:
click to enlarge
As you can see while the price of oil has risen from about $100 to $130+ (or about 30%), the price of the stocks that drill for this oil has not risen. Actually the prices went down with the market. Then these stocks generally recouped their losses as the market recovered.
If you look at the chart patterns you can see these stocks have been consolidating recently. Oil prices will likely push higher over the summer. It is hurricane season. It seems that the above stocks are about to break out of their consolidation phase due to the already considerable drag of oil prices. If oil prices go up still further this summer, these stocks should skyrocket. In the past these stocks have risen as oil prices have risen. There is no reason to expect that pattern to break.
Already RIG, NE, and DO seem primed to explode (i.e. without any further increase in the price of oil). A 30% difference in the price growth of oil versus the price growth of these stocks puts me in mind of a tightly drawn rubberband. It looks like this rubberband is currently being released. It should propel these stocks much higher.
I note that RIG seems to have predicted slower growth in the near future, if you go by the FPE. However, it also has the lowest PE and the highest long term growth rate -- lowest PEG ratio (= highest 5 year growth rate). I believe some of the short term lack of growth may be due to adjustments being made to merge GSF with the former RIG. With the obvious world demand for quick deep sea oil field development, this bigger RIG may be ideally positioned to take advantage of this demand. It is a big buy.
Disclosure: Long
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Transocean has the lowest multiples and is the leader. RIG owns 7 of the 16 ultra deepwater rigs available to market through the end of 2010. They also have 5 enhanced-Enterprise drillships coming on which will be able to drill in 12,000 feet of water and to 40,000 feet TVD.
I also have a large psoition in NOV which I have cultivated over time, I would submit they would be a good addition to any services portfolio, they are a key player in all the rig players supply chain.
Otherwise too much demand destruction will occur resulting in weaker economies, lower demand, higher adoption of non-oil alternatives.
Plus, expect the Asian countries to consume less oil (near term, over the next couple of years) than they do now as those subsidies are phased out. Too much money is getting into the system which is causing runaway inflation over there.
I don't think their results will vary that much depending on oil price - they don't really get a cut (do they?). At anything close to today's oil price, their services are gonna be at max demand and they'll be building capacity and hiring workers as fast as they can. There's a limit to how fast they can expand.
So that's why I like them - they won't float with the oil price, either up or down - they're solid.
But I'm no expert, someone correct me heh.
It's hard to believe they could get more from us than the Republicans did for their endless wars, illegal wiretaps and gay sex in public restrooms.
I believe the US outer shelf will be opened for drilling, since the public pressure on the politicians will be untenable over time not to. I that happens the guys that have the drilling rigs in place will be in the driver seat.
If I were to hire a company for a deep sea drilling project that would cost me a couple of hundred million dollars for a hit or miss I would go with the best in class.
Bigger is apparently better. It was recently announced that RIG holds the standing record for deep drilling ~ 40,000 ft down. RIG is the biggest animal in that market and they are performing.
Oil co's have so much money that to justify their greed must invest in deepwater exploration.
No one knows with any degree of certainty how much oil is in deepwater ie. more than 20000 ft below seabed.
If oil is discovered how will it be extracted? and in the quantity to
justify the investment?
The technical problems are enormous.
Getting the oil to market from a new discovery will be take more than 5years.
I have more questions to ask when the above is answered
Ultimate depth will be 35,000 feet. Show me another deep sea driller that has beaten that.