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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Retired senior executive of Charles Schwab and Co. Retired (36 years) active and reserve military service -- six in special operations, the next 30 in the intelligence... More
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Stanford Wealth Management LLC
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  • The "BP" Spill: Where Science and Opportunity Intersect? Part II

    In Part I of this article, I made the case that if the mitigation of the environmental and economic impact is more pronounced and/or rapid than we now believe, a number of oil companies and oil service firms will do far better than their current prices indicate.  If the history of the other two biggest spills in history, that may very well be the case.  Here are two oil service firms I suggest for your further due diligence:

     

    Oil Services, Onshore and Offshore

     

    Weatherford International (NYSE:WFT) is one of the best-diversified oil service companies in the world.  With more than 50,000 employees in over 100 countries, WFT has 50 manufacturing facilities building rigs and equipment and 486 service locations (on every continent except Antarctica.)  As you can see below, in a comparison with Schlumberger, Baker Hughes, and Halliburton, WFT’s compound annual growth rate exceeds any of their peers.

     

    38% of the company’s revenue comes from the United States and Canada; the other 62% comes from other nations.  Clearly, they are well-diversified geographically. I’ve commented before, in reviewing certain companies, that I liked their websites because they are not investor-focused.  It bothers me when I see a homepage clearly designed to appeal to investors, with the current price of the stocks squiggling across the top half and the company’s latest investor pronouncements occupying the bottom half.  Give me instead a company like Weatherford that is clearly designed to elicit business from those within the industry. 

     

    If you want to see just how complex the oil services industry is, may I recommend a visit to Weatherford’s website.  There you can see the myriad  products and services that a  class outfit like Weatherford can provide.  By “covering the waterfront” (and what’s below the water and on the land, as well) I believe Weatherford adds product and service diversification to its geographic diversification. 

     

    The next two charts, courtesy of Ford Equity Research, compare WFT to a completely different set of peers and show not only where the company ranks compared to these competitors but also compared to its historical range in terms of price/book and price/sales.  As you can see, it is currently at the low end of these two key measures of valuation. 

     

    These charts show the current situation and the historical range for the company, but what about the future?  The three areas I believe Weatherford is strongest in are  shale, heavy oil, and deepwater services.   In the US, they are a market leader in services for oil and natural gas shale fracturing; in Canada they are a powerhouse in heavy oil extraction; and around the world they are respected as a leader in deepwater drilling.  I believe these regions and these specialties will propel Weatherford higher over the coming years.

     





















    Oil Services, 100% Offshore

     

    As a value investor, I want to own companies in a nation with good political and corporate governance.  Places like Canada, Australia, and Norway come immediately to mind.  This next recommendation comes to us from the Land of the Midnight Sun, which is also the land of harsh weather extremes and brilliant engineers.  The combination of the two has provided investors with a number of technologically-advanced opportunities within some of our favorite sectors. 

     

    Seadrill Limited (NYSE:SDRL), as its name implies, is all about offshore drilling.  They, too, have one of those informative-to-potential-clients websites.  They do list their stock price, but I think only to avoid confusion between its price on the New York Stock Exchange and on the Oslo Stock Exchange.  (And that's stock listing is still smaller than the number of job openings they are posting on any given day -- right there on the home page!)

     

    Seadrill is smaller than Weatherford, but also a purer play on offshore drilling.  They operate a versatile fleet of 48 different rigs for operations in shallow to ultra-deepwater areas in environments harsh and benign, using their semi-submersibles, jack-up rigs, tender and semi-tender rigs, and deepwater drillships to help their client oil and gas companies safely find and safely extract product from the world’s oceans. 

     

    Their workforce to allow them to do this consists of some 7,500 skilled workers, representing 50 nationalities, who operate in 15 countries on five continents.  And SDRL is still going full speed ahead in their chosen specialty -- they own the 2nd-largest ultra-deepwater fleet in the world (second only to Transocean, whose fleet averages 22 years old, while SDRL’s is just 4 years old).  Seadrill also owns the biggest and most modern jack-up and tender rig fleet (RIG’s fleet averages 28 years; SDRL’s average is just 3 years old!) and, based on enterprise value, they are the  2nd-largest offshore driller in the world.  Their current contracted backlog is over $12 billion US.

     

    Please notice I used the word "safely" twice above.  It is a word that appears regularly on SDRL’s website.  When you have cut your teeth in the violent North Sea, you are either safety-conscious or an accident waiting to happen.  SDRL is serious when it says that it strives for zero injuries to people and no harm to the environment.  Two ways they do so are clearly stated in their written material: “We take the time necessary for thorough planning and execution.”  Now there’s a concept!  And “We respond immediately to unsatisfactory conditions.”  I’ve crossed the North Sea in a storm; when you look outside and see 50 foot waves washing across the bow you gain immediate respect for the power of Nature of the even greater respect for those who have demonstrated a respect for it! 

     

    The biggest of Big Oil seem to agree.  The chart in the first column shows the firms that SDRL’s backlog is comprised of.  Not a lot of likelihood of cancellation in this blue chip group!  Also on their website, under “Related Companies,” they not only list all their affiliates but many of their competitors in deepwater drilling, as well, with direct links to their websites.  Now that takes confidence! To me it’s like saying, “Here’s our story; now check out our competitors.  You’ll be back.”

     

    And I believe they will.  I discussed the age of their fleet above.  Why is this so important?  Because  the easy oil has all been found – the big companies hiring day-rate equipment now demand rigs with greater capabilities than the ones built 20 years ago can offer.  They are targeting possible finds in deeper water, extending deeper wells, and drilling into more challenging reservoirs in more remote locations.  To do this they need to use larger diameter well bores, bigger and more complex completions and advanced drilling fluids.  To do all this they need modern rigs designed for these more challenging environments.

     

    The company has built on its abilities in a typically Norwegian way: slowly, steadily, and keeping to their plan.  The results are impressive.  Unlike Weatherford, SDRL does pay a dividend.  Unlike most foreign firms that pay only twice a year, they pay quarterly.  And unlike many companies these days, they can afford to pay a hefty dividend -- just over 8.5% annually at the current price. 

     

     

    Author's Disclosure:  We and those clients for whom it is appropriate own or are purchasing SDRL and WFT.  

     

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

     

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     


    Tags: SDRL, WFT, energy, longs
    Sep 14 1:31 PM | Link | 3 Comments
  • The "BP" Spill: Where Science and Opportunity Intersect? Part I

    How long will the Gulf oil spill impact the environment?

    No one knows for certain.  But if the effects of the spill are cleared up more quickly than currently expected by investors, there could be a number of investment opportunities lurking, well, “just below the surface” among those companies sold off by investors during the full flow of bad news. 

    Ask one group of oceanographers, marine biologists and petroleum geologists, and you’ll get some scary projections.  Ask another group of equally-qualified and similarly-educated oceanographers, marine biologists and petroleum geologists, and you’ll get a far more sanguine response.  What’s an investor to do?

    I claim no academic or engineering expertise in this area -- like most, I don't have the tools to wade through all the conflicting claims and prognostications.  But, as a fundamental value investor, I do have the experience, desire and patience to seek unpopular companies whose fundamentals are rock-solid but whose name is currently mud (or Macondo.)  And I have some personal experience that makes me a bit more hopeful than others might be.

    I have seen firsthand the biggest oil spill in the history of the world.  No, that was not the Deepwater Horizon (DH).  It was the environmental hell unleashed by Saddam Hussein during the Gulf war.  Marching or riding through hundreds of square miles of black, billowing, oily smoke, those of us on the ground ultimately reached the Arabian (if you're an Arab) / Persian (if you are Iranian) Gulf.  The devastation there was, if anything, even more unbelievable than what we had seen on land.  It was, literally, a sea of oil as far as the eye could see.  The best estimates were that it covered more than 4000 square miles to a depth of 5 inches or more.  More than 800 miles of Kuwait and Saudi Arabian beaches were oiled and marine wildlife and migratory and non-migratory bird populations were overwhelmed.  That was the biggest oil spill ever.

    Particulates from the 1 billion to 1.5 billion barrels of oil that went up in smoke on the land only added to the intentional spill in the Gulf, as did some of the oil “spilled” via the sabotaged fields in Kuwait.  That oil intentionally spilled directly in to the Gulf was some  6 million to 8 million barrels, as determined by the EPA and the United Nations in the this year.

    By comparison, the DH spill is estimated by various US government agencies at 4.1 million to 4.3 million barrels, slightly larger than the previous largest accidental oil spill in history, Pemex’s Ixtoc 1 field offshore Mexico, also in the Gulf or Mexico, estimated to have spilled 3.3 million to 3.5 million barrels of oil.

    Incidentally, the Exxon Valdez is estimated to have spilled anywhere from 260 thousand to 750 thousand barrels, which doesn’t register among the top spills of this or the last century.  But here’s the difference: the Valdez ran aground at latitude 61° 02’ North.  In those frigid and slow-moving waters, the problem was compounded by the remoteness of the location, the poor preparedness in contingency planning for such an incident, the dearth of microbial activity in those waters, and the rocky shoreline and gravel beaches.

    This last was confirmed recently by an engineering team from Temple University which concluded that, 20 years after the Valdez ran aground, there are still some 475 barrels of oil trapped in the lower layers of gravel, at which level the head of the team, Michel C. Boufadel, chairman of the Department of Civil and Environmental Engineering, estimates that water -- which in open ocean or sandy beaches would have broken up and dissipated the oil long ago -- moves through this lower level of gravel up to 1,000 times more slowly.  In this nearly oxygen-free environment there are few microbes that feast on the oil and biodegrade it.

    The Deepwater Horizon drill site, however, lies at approximately latitude 28° 44’ north of the equator.  The epicenter of the worst of the intentional Persian Gulf oil spill was almost directly east of Kuwait City, which lies at 29° 20’ North.  The Ixtoc 1 spill took place at latitude 19° 44’ North. That is to say, these three huge spills occurred in remarkably similar waters.  So, rather than compare apples to oranges using the DH and the Exxon Valdez, it seems the more rational and empirical observations would be found by comparing the Deepwater Horizon to Ixtoc 1 and the Persian Gulf spills.  DH lies between the latitudinal locations of these two, so its after-effects and recovery times are more likely to  predict the likely recovery from the Deepwater Horizon.

    I have returned to the Persian Gulf since the Gulf War.  I was most recently there on temporary military duty in 2005 in Qatar, where I happened to meet a marine biologist on my departing flight.  When I told him I was surprised that the waters seemed sparklingly clear, he informed me that he believed the Gulf had completely recovered to pre-war conditions within by the time of his studies, from 6-12 years later.  When I asked how it was possible to return from the amazing devastation I had witnessed – from which none of us thought it would ever recover – he replied that Nature has been dealing with natural oil seeps forever and microbes have evolved and continue to evolve that dine on oil and turn it into organic material consumed by small (but larger than microbial) marine organisms.

    He also pointed out that, at that latitude, the intense heat creates greater evaporation of the oil which, sooner or later, finds its way to the surface.  And he said something else I find eminently logical: the more food there is for any species, the more its population will expand.  By analogy, in years when there are big rains resulting in ample vegetation, our rabbit population out West explodes – and so does the coyote population that feasts on rabbits.  In less fecund years, more of each species, whether plant or animal, might die of starvation, or disease or trauma caused by the weakness that subsistence-only nutrition causes.  By extension, he explained that the microbial population bursts out to match the increased level of food, then declines again as the food source declines to more normal levels.

    The story seems to have been the same in Campeche Sound, site of the  Ixtoc 1 spill.  Luis Soto, a deep-sea biologist who had just received his doctorate from the University of Miami, said he feared the worst when they examined sea life in the sound once Pemex capped the blowout in March 1980.  "To be honest, because of our ignorance, we thought everything was going to die," he said.  But Soto and other scientists now say Campeche Sound recovered quickly, and its large shrimp industry returned to completely normal within two summers.   The scientists didn't know then what salutary effects the warmer temperatures of Gulf waters, intense solar radiation, and huge microbial population already there feeding on the 980,000 barrels of oil the National Academies Press (a clearinghouse for studies from the National Academy of Sciences, the National Academy of Engineering, the Institute of Medicine, and the National Research Council) estimates seep into the Gulf of Mexico every year. 

    According to studies by Texas A&M, thanks to microbial activity and solar radiation aquatic life along the shoreline in Texas (where beaches were closed due to oil washing ashore in 1979) had returned to completely normal within three years.  One of the marine biologists in charge of these studies said of this activity, "The good side of having all that seepage out there is that we've got a huge population of microbes, bacteria that feed on petroleum products in the water and on shore. So that helps the recovery time."

    I give some credence to the non-marine biologist, non-petroleum geologist members of the press, and shrill warnings from those whose agenda includes sky-is-falling projections every time fossil fuels are discussed.  But I must balance these against the empirical evidence of both the Persian Gulf and Ixtoc 1 spills. 

    If history repeats in some way closer to these actual experiences than the strident projections of those who have not studied these previous incidents, then investors may have oversold the big oil companies that are exploring offshore, particularly in the prolific Gulf of Mexico.  Much of the "spam" mail I get lately is from newsletters touting shale-fracked onshore natural gas or other oil deposits since "offshore drilling is dead for a generation or more."   I disagree.  Based upon the empirical evidence from the previous two largest spills in history, I believe investors have  oversold the offshore drillers. 

    Land drillers have enjoyed a resurgence of interest, but many investors are holding their breath, and their wallets, when it comes to offshore drillers and oilfield services companies.  While I still expect a poor market over the remaining months of the summer, I am willing to begin taking pilot positions in the biggest of the big oil companies operating in the Gulf of Mexico.  We have bought shares of Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.B), Chevron (NYSE:CVX), Statoil (NYSE:STO) and, at these prices, even BP.

    It isn’t enough that the empirical evidence and historical record above are accurate, of course.  Investors must also reach the same conclusion -- preferably the week after we finish loading up!  Given the intrinsic value in these selections, I am willing to begin accumulating them now and adding to them on any pullbacks.  I'm also willing to buy two drillers, one of which works on both land and sea and the other, more specialized, the premier offshore service and drilling company in the world.  I'll discuss these in depth in Part II, tomorrow. <  >

     

    Author's Disclosure:  We and those clients for whom it is appropriate own or are purchasing XOM, CVX, RDS.B, BP and STO -- as well as the two service & drilling firms we'll discuss tomorrow.

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.


    Tags: XOM, CVX, RDS.B, BP, STO, Energy, Longs
    Sep 13 11:03 AM | Link | Comment!
  • Mark Hulbert’s Take: What Are the Odds of a September Decline?

    Some of the work Mark Hulbert does is nothing more than telling us what the gurus in the universe he follows are thinking individually and, more frequently, in the aggregate.  But of late, he also has been doing some far more interesting analysis in the “Yale Hirsch” mode – and the results are not satisfying if you are a bull.
     

    The bullish case seems to rest on two platforms: (1) August was really bad therefore September should be good in reaction to that, and (2) “Everyone” now expects the current crop of politicos to suffer major setbacks in November and, since the market is a predictive mechanism, investors are positioning themselves today for what they believe will be wonderful news post-November (like an extension of the current tax rates and a reduction in pork-barrel spending by irresponsible pols.)
     

    The Dow rallied more than 300 points the first two days of September so, making the usual straight-line assumption, bulls believe that today is the day to get invested,  Hmmm.  Let’s examine each of the above platforms in turn.
     

    Quoting Mr. Hulbert’s conclusions based upon his historical analysis:
     

    “I have good news and bad news when it comes to slicing and dicing the historical data as it pertains to September.

    “The good news is that it is possible, by carefully reading the statistical tea leaves, to get advance insight into whether any given month is likely to do better or worse than average.

    “The bad news: Those tea leaves provide no such hope that this September will be able to beat its historical reputation as being awful for stocks.”
     

    His research shows that since 1896 (the year the Dow Jones Industrial Average was created,) the Dow has lost an average of 1.15% in September. The average gain for all other months was 0.71%.  Worse, a look at the historical record shows that Septembers did not show a 1.15% decline following a bad August – they showed a 2.7% decline!   Typically, when August is down, as goes August, so goes September -- only twice as bad as usual.

    Worse than that, Hulbert notes, “During each of the past nine decades... September's rank relative to other months in terms of performance was never higher than ninth. It was dead last in five of those nine decades -- including the most recent one.”

    He adds a final bit of gasoline to this bonfire by noting that the CBOE's Volatility Index (VIX) is relatively low going into September, the month tends to do better.  Uh-oh.  The VIX at the end of August was quite a bit higher than 20.   (And for those who have followed our comments on the VXX and VXZ ETFs in the past, we believe they have now entered an excellent buy area.)

    As for the second platform, the market seldom reacts favorably to the same news twice.  I’ve been writing for two years that the pendulum will swing, that the 2008 election was a rejection of the guns-and-butter policy of the previous administration and was little different than the voters’ rejection of President Johnson’s guns and butter policies in 1968 (thrusting Richard Nixon into office with disastrous consequences we hope are not repeated this time around), and that mid-term elections are almost always about mitigating the euphoria of the previous presidential election.  This is not news!

    The rally of September 1st and 2nd may have occurred as a result of Johnny-come-latelies reaching the conclusion Wall Street reached about the mid-term elections weeks or months ago.  If that is the case, I imagine the smart money is rubbing their hands with glee and using this rally to lay on bigger short positions. 


    The current rally was ostensibly about the fact that the Chinese Purchasing Managers Index rose to 51.7 in August from 51.2 in July, followed by the news that the U.S ISM Manufacturing Index improved from 55.5 in July to 56.3 in August.  I don't see it – these incremental numbers are nothing but decimal dust in the grand scheme of things!  Easily manipulated by the bureaucrats in charge of such numbers, the “improvement” is so small as to be barely measurable – and to raise not a stir among the media when they are “revised” from “up 0.5%” to “down 0.1%” or whatever in another month.
     

    The other economic numbers that form the backdrop to this rally include: Canada’s GDP fell to an annual rate of 2% in the 2nd quarter, down from 5.8% in Q1; auto sales absolutely plunged in the U.S. and around the world;there was a continued drop in U.S. construction spending; there were declining retail sales in Euro nations; and the ADP employment report indicating that we didn’t just grow jobs at too slow a pace to cover all the new workers entering the labor force, but we actually lost some 10,000 private sector jobs!  Government is still hiring, of course, but  we must always remember: the private sector is income, government is overhead.  That doesn’t mean we don’t need certain government workers – what hellish existence would it be without fire and police protection, or good teachers to educate our children?  But it is still overhead even if we collectively choose to pay for it in order to enhance our safety or literacy.
     

    Bottom line: September tends to do worse in years that August has been bad.  August was bad.  The news of the mid-term elections is already old news and will most likely follow the historical path of all mid-term elections.  We will return more to the center.  And the good news to propel the market higher is likely to be short-lived.  Clearly, we aren’t out of the woods yet. If the market is in a news-dominated phase, we are likely in big trouble.


    For our clients we are stressing safety, with inverse ETF protection from the likes of SH, RWM, QID and EUM.  (If the US and Europe aren’t consuming, who is going to order stuff from the emerging nations?  They will fall if our markets and economies fall…)  We are also buying VXX and VXZ and are keeping our bond positions short and inflation-resistant, as we do with WIP, TIP, BWZ, and MINT.  Finally, we own some special situations in precious metals, energy and agriculture.  (See previous articles for specifics…)

     

    Author's Disclosure: We and those clients for whom it is appropriate own SH, RWM, QID EUM, VXX, VXZ, WIP, TIP, BWZ, and MINT as well as the previously-articulated special situations in precious metals, energy and agriculture.

     

     

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

    Sep 02 5:34 PM | Link | Comment!
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