Offshore U.S. Drilling Proposals Bullish for National-Oilwell Varco

Congress has finally decided to consider what President Reagan had proposed in the 1980s. The opening of our coastline to oil drillers seems to be a great move in trying to keep the price of oil down. Not only will it do this but it will also help the United States with its deficit as we will import less oil. It will also provide a new stream of revenue for Exxon (XOM), ConocoPhillips (COP) and Chevron (CVX). This newfound growth will increase capital expenditures as companies scramble for growth.

The most important factor of this drilling is that it is not a want, but a need. Politicians can blame "speculators", world growth, or the filling of strategic oil reserves in China all they want: the most important issue is that we have a major problem. The spiral of oil to deficit to weak dollar needs to be corrected before faith is lost for investors in US currency. If faith is lost, massive selling could cause the dollar to free fall, although it is unlikely, but new investment in the dollar has slowed and needs to be stimulated as the mortgage crisis weighs on our economy.

There are many ways to play the possibility of opening up the coasts to drilling. Benefactors include: oil conglomerates, drilling companies and most importantly companies that make the jackup, semi-submersible and high specification drill ships. When a trade occurs, the first companies to benefit are the ones that get paid first. Current supplies of offshore drilling platforms and ships are already low and would move lower on this announcement. Those that build them already have a high level of backorders, so expect this to increase even more.

Politically, the Democrats and Republicans will fight over this issue, but expect a compromise with the election coming up. The Democrats will make their stand to stop the drilling of the Arctic National Wildlife Refuge, and may even win with respect to how close the drillers are allowed to work from shore. I believe that the Democrats will try to help lower oil prices by pushing through a bill that will allow deeper drilling using the "out of sight, out of mind" perspective. This will increase demand for high specification drill ships the most and provide companies such as Transocean (RIG) with increased margins as day rates continue to skyrocket.

The first quarter was another good one for National-Oilwell Varco (NOV). EPS increased 42% year over year for the first quarter. Revenues increased 24% over the same period of time. As of March 31st, their backlog increased from $9 billion (as of December 31, 2007) to $9.9 billion. New orders for the first quarter were $2 billion. NOV's Grant Prideco acquisition is also bullish for the company as they are trying to buy additional growth through offering additional products to their customers. This should continue to increase growth in a sector that is already growing briskly.

The current trend for this stock is bullish from a chart perspective. They are holding their pattern and if the trend holds, have a price objective of $105. I believe this sector is in the transformation stage as are agricultural commodities. This movement can last for many years, and unless you believe that oil will go back down to $70 a barrel, there will be continued growth. When National Oilwell and Varco merged, there seemed to be little problem even though it essentially created a monopoly in the space. There is still time to capitalize.

Disclosure: Long

Comments

[longoil]

The problem with offshore US oil; there is an only estimated supply of 15 to 20 bbls. This would satisfy less than 2 years of current US demand. It is about the same amount present in ANWR (Alaska).

From a purely practical point of view, there both is an argument against drilling and an argument for drilling.

1) Would it not be better to let Saudi Arabia and Kuwait pump out all their oil and drill this coastal oil when the global supplies are scarcer in the future?

or

2) On the other side of the coin, drill the reserves off the coast of Florida now before Cuba (with China's help) drills into it 50 miles from the Florida Keys.

[BrianPursley]

What makes you think the Democrat Party cares about America's needs?

news.yahoo.com/s/ap/20...

"WASHINGTON - With gasoline topping $4 a gallon, President Bush urged Congress on Wednesday to lift its long-standing ban on offshore oil and gas drilling, saying the United States needs to increase its energy production. Democrats quickly rejected the idea."

[finmah]

From reading other articles your estimates are bit low - I have heard 6 years supply - but no one really knows. I know that I am getting tired of people leaving hundreds of billions on the table in every corner of this country with this country in desperate need of a reduction in imports, higher tax receipts, more real employment, and lower energy prices. It seems that one group of politicians has lied to us for over thirty years and should be sued for all the hardships and lost opportunity costs - at least vote them out. I am really tired of these same politicians instilling fears in people and other lay people who are telling everyone there isn't enough and it really won't make a difference. Apparently China doesn't feel that way by drilling right off our coast. It is time for people to decouple the issue from junk science and politics and listen to the real market.
Oil going from 12 to 130 barrel is enough of a trend to take notice.

[Emerald]

Vote out incumbents. U.S. shoreline oil will take 5-7 years to see the first barrell if we start today, but we should anyway. No spare refining capacity. We need a Marshall Plan for alternative energies ASAP or we will find ourselves in another oil war before long. Think not? Today's press notes the no-bid oil field service contracts for U.S. firms in Iraq. I'm ok with this, but remember how many troops died for it. Hydrogen, nuclear, nat gas, fuel cells, solar now!

[jcrash]

Longoil,
15 or 20 bbls? I don't think that will fill up 1 house in the ghetto for the winter.

[AlbatrossHU-16E]

If (NOV) is such a good investment idea, why did the CEO sell all his stock (approx. 475000 shares) the past few weeks?

[RightinSanFrancisco]

There is no way to get from 2008 to 2025 without maximizing our oil, getting coal to be less polluting, adopting McCain's posture on nuclear, and greatly increasing automotive standards. The other green stuff feels good and should generally be done, but the future lies in coal (ugly, but practical), and nuclear.

[Davo]

Drill here, Drill now.

[CrossProfit]

"It will also provide a new stream of revenue for Exxon (XOM), ConocoPhillips (COP) and Chevron (CVX)."

...and this is based on...???

CrossProfit

[mythoughts]

Let's pay dumb, as we are doing now, and let Cuba, with China's help, drill off our coasts and get our oil.

[rbblum]

The difference between the US Congress and environmentalists . . . US Congressional representatives will take any position benefitting themselves and lobbyists. Environmentalists will take any position benefitting earth, preferably without the presence of humans.

And yet, the article (Offshore US Drilling) is presenting a viable investment opportunity during the transitional times for our primary energy needs.

The hell with the distractors and the distractions.

Long NOV and RIG.

[devassocx]

a prosperous US depends on abundant and cheap energy. Groups
that oppose this on grounds of greenness or other nonsense are to be shunned and removed from power. They are just luddites or wish to control the behavior of society for their own benefit.

Sometimes we are our own worst enemy.

[AlbatrossHU-16E]

If (NOV) is such a good investment, why did the ceo sell all his stock approx. 475,000 shares? The ans. is "fully valued" unless (NOV) can expand their operations as they are maxed out.

[MichaelFilloon(legmaker)]

I know all of you that are long oil think there is no way the market will pull back. Supply and demand says different. At some point we will have to drill off of our shores, it is just a matter of when and how much. Look at NOV's backlog and you will see this company still has a long way to go. This is a great company with great management and if you are bullish or bearish oil they will continue to take orders and make high spec drill ships. As for Albatross HU-16E, if you want to know why the CEO is selling shares, why don't you call him, it doesnt mean the shares are fully valued, just your estimation as my estimation that the shares are still going up. If you want to prove an analysis wrong, wait til it is, if not go find inforamation in stead of trying to make additional work for those of us that would like others to make money on a stock. Otherwise your comments have little value to anyone on the site.