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  • Ocean Rig's Thoughts On The Outlook For The Floating Rig Market
    Yesterday, 1:33 PM ORIG Comment!

    Summary

    • Ocean Rig provided an in-depth analysis of the floating drilling rig market in a recent presentation to investors.
    • The floating rig market is currently quite challenging due to several factors including a reduction in demand for floating rigs and increasing supply.
    • Oil and gas companies have been expressing a marked preference for contracting modern offshore drilling rigs and thus making it difficult for older rigs to get contracts.
    • The supply of older rigs is thus likely to fall and cause the worldwide floater fleet to decline over the next two years.
    • Unless oil and gas companies increase their demand for floating drilling rigs, the market is likely to remain challenging until at least 2017.
  • Reviewing Ensco's Recent Industry Presentation
    Editors' Pick • Yesterday, 1:30 PM ESV 8 Comments

    Summary

    • Ensco gave a presentation at the Goldman Sachs Global Energy Conference that does an excellent job discussing current industry trends and the company's positioning.
    • Ensco is one of the largest offshore drilling contractors in the world, boasting a globally diversified fleet of 66 offshore drilling rigs.
    • Ensco has a very well-diversified revenue base and a presence is every major offshore market. The company also has low leverage which provides safety.
    • The near-term outlook for floating ultra-deepwater rigs is negative as demand is falling just as a large number of new rigs are hitting the market.
    • The market for jack-up rigs is stronger than the floating market but there is a very real risk of near-term oversupply.
  • Reasoning For SNB Removal Of Euro Peg And Implications For Investors
    Wed, Jan. 21 Comment!

    Summary

    • Late last week, the SNB ended its longstanding peg to the euro, shocking the financial world.
    • Economic conditions in Europe are pointing to the potential for more QE from the ECB, which Goldman Sachs apparently agrees with.
    • In order to maintain its peg to the euro, the SNB would need to print enormous quantities of Swiss francs, which it appears unwilling to do.
    • Swiss companies that operate internationally will likely have downward pressure on their earnings due to currency appreciation.
    • Dividends paid by Swiss companies may now be more valuable than before the peg was removed.
  • Are Commodity Trends Pointing To A Global Economic Slowdown?
    Fri, Jan. 16 USO, OIL, UCO 2 Comments

    Summary

    • The commodity markets can serve as an excellent gauge of the economy's overall health.
    • The prices of numerous commodities have been declining in recent weeks, indicating that overall demand is decreasing.
    • Oil inventories and gasoline inventories are increasing, showing that oil demand is decreasing.
    • The number of jobless claims has been climbing and retail sales are decreasing, possibly caused by oil price declines.
    • All of these things are signs of a weakening global economy.
  • Untangling Seadrill's Complicated Debt Structure
    Thu, Jan. 15 SDRL 35 Comments

    Summary

    • Seadrill's debt structure is very complicated because the company has three subsidiaries whose results are consolidated into its own. It is not the sole stockholder in these.
    • One of the basic tenets of corporate law is that the liabilities of a subsidiary corporation do not pass through to the parent corporation.
    • Seadrill finances itself through a combination of lease-buyback agreements, bank loans, and bond debt.
    • This article undoes the effects of consolidation and shows which debt is actually Seadrill's and which is owed by subsidiary corporations.
    • When consolidation is undone, Seadrill's debt load is lower than it appears on the company's consolidated balance sheets.
  • Is ExxonMobil The Best Way To Play A Rebound In Oil Prices?
    Tue, Jan. 13 XOM 24 Comments

    Summary

    • ExxonMobil has been touted by many as a way to profit off the rebound in oil prices.
    • ExxonMobil currently trades at a premium valuation to its peers and has a smaller dividend.
    • ExxonMobil's stock has outperformed its peer group throughout the current decline, meaning it could have lower upside potential.
    • ExxonMobil's production has declined over the past few years but its strong balance sheet offers the opportunity to turn that around.
    • ExxonMobil is a viable choice to profit from an oil price rebound but some other candidates may be better.
  • Is Seadrill Partners A Suitable Income Investment For Retirees?
    Mon, Jan. 12 SDLP 31 Comments

    Summary

    • Seadrill Partners offers a high distribution yield backed by very long-term contracts.
    • However, it is not a "buy and forget" stock and the current conditions overhanging the offshore drilling market may make it difficult for the company to replace contracts.
    • This could result in both cash flow and revenue declines.
    • The first rig to come off contract does so in March 2015 then two more come off in April 2017.
    • The distribution may be cut if the industry does not firm up by the end of 2016.
  • Further Evidence That Low Oil Prices Are Not Unequivocally Good For The U.S. Economy
    Mon, Jan. 12 OIL, USO, X 5 Comments

    Summary

    • The mainstream media continues to propagate the myth that low oil prices are unequivocally good for the U.S. economy.
    • In the past several weeks, there have been numerous indications that this is simply not true.
    • Last week, US Steel announced the layoff of 756 well-paid steelworkers due to declining steel demand from the oil and gas industry.
    • The number of active rigs in the United States has been declining for weeks, pointing to the likelihood of further layoffs.
    • This is because the economics of shale oil production are seriously challenged at today's prices.
  • Examining The Current Conditions In The Offshore Drilling Industry
    Editors' Pick • Fri, Jan. 9 NADL, PACD, SDRL 13 Comments

    Summary

    • Once per month, analytics provider IHS Petrodata assembles various dayrate and utilization trend information for offshore drilling rigs.
    • Analysts and investors have expressed considerable concern about the currently challenging conditions in the industry.
    • The offshore drilling industry is indeed quite challenging for those companies in it; however, it is not as bad as media reports would lead people to believe.
    • The decline in oil prices has had an effect on the industry, particularly on contracting activity.
  • Is Citigroup Jumping Into The Fire?
    Thu, Jan. 8 C 14 Comments

    Summary

    • The derivatives market dwarfs all other financial markets in terms of size.
    • There are significant risks with the derivatives market which were seen first hand when insurance giant AIG required the largest federal bailout in history a few years ago.
    • The balance sheets of major banks do not adequately explain the risks that these securities pose.
    • Citigroup has been rapidly increasing its derivative holdings at a time when all other participants in the market are reducing it.
    • There is reason to believe that Citigroup is well aware of and concerned about the risks that it is exposing to which make its actions puzzling.
  • Why Declining Oil Prices Are Not Unequivocally Good For The U.S. Economy
    Tue, Jan. 6 XLE, USO, OIL 17 Comments

    Summary

    • For the past few months, analysts have been repeating the claim that lower oil prices are a boon to the US economy but this is not completely true.
    • These claims simply look at the demand side of oil prices and determine that the average consumer will have more money to spend every month.
    • The decline in oil prices will have a significant negative effect on CapEx spending which will be a drag on GDP.
    • The energy industry has been one of the few bright spots in the economy over the past six or seven years, providing high-paying full-time jobs.
    • The reduction in oil prices could threaten many of these jobs and there is unlikely to be as desirable a replacement job for these workers.
  • Understanding Seadrill's Forward Financial Needs
    Fri, Jan. 2 SDRL 86 Comments

    Summary

    • Seadrill has a number of new rigs scheduled to come online in the next two years for which it needs to obtain funding for.
    • While Seadrill does have contracts already for some of these rigs, the majority of the company's new rigs do not yet have contracts.
    • Goldman Sachs is concerned that this could put the company in violation of its debt covenants and that the company may have difficulty obtaining financing.
    • Seadrill has thus far had no difficulty obtaining financing despite the challenging conditions in the industry.
    • Seadrill has significant financial flexibility and this should allow the company to avoid a debt covenant violation.
  • Examining North Atlantic Drilling's Risk Of Bankruptcy
     • Dec. 30, 2014 NADL 72 Comments

    Summary

    • North Atlantic Drilling has one of the highest debt-to-equity ratios of any offshore drilling contractor.
    • The company has strong forward revenue and cash flow visibility.
    • The company's revenues and cash flows look likely to decline in 2015 which will leave it unable to finance all of its maturing debt with its cash flows.
    • North Atlantic Drilling does have several options available to it in the event that it is cut off from the credit market.
    • The company does have some significant risks due to its dependence on several key contracts with Russian oil giant Rosneft.
  • Pacific Drilling Appears To Offer Impressive Opportunity Despite Risks
    Dec. 29, 2014 PACD 12 Comments

    Summary

    • Pacific Drilling has one of the most modern and technically-capable fleets of ultra-deepwater rigs in the industry.
    • This positions the company quite well in the industry due to the preference that customers have for these modern rigs.
    • Pacific Drilling has a history of strong growth and the potential to continue on its growth trajectory even with the current weakness in the industry.
    • Pacific Drilling has some potential risks to its cash flow in the coming months but this should not have the impact that the market is implying.
    • At its current levels, the stock appears to be oversold and could offer an intriguing opportunity for investors.
  • Why Low Oil Prices Are Not The New Normal
    Dec. 24, 2014 BHI, TOT, CRUD 13 Comments

    Summary

    • Oil prices have declined precipitously over the past six months and this has strained the cash flows of the world's exploration and production companies.
    • As a result of these strained cash flows, E&P companies have been decreasing their spending on exploration programs.
    • E&P companies are also decreasing spending on developing many of their projects, putting 2.3 million barrels of new production at risk by 2020 and 7.5 million barrels by 2025.
    • This all points to oil production being much lower by the end of the decade than it would have been had the price crash not occurred.
    • This should result in the current oversupply being eliminated going forward.
  • Understanding The Oil Price War
    Dec. 23, 2014 AGG, HYG, XOM 12 Comments

    Summary

    • The OPEC nations, led primarily by Saudi Arabia, have been actively engaged in an economic war against Russia, Iran, and North America.
    • This has had a much larger impact on oil prices than the so-called "glut," the existence of which is questionable at best.
    • The purpose of this war is to weaken the Russian and Iranian economies as both are more dependent on high oil prices than the OPEC nations'.
    • While the elimination of North America's shale production may or may not be the motivation, it is likely to be a casualty.
    • The OPEC nations seem to expect that oil prices will surge much higher once a sizable amount of the current oil production is driven out of the market.
  • Seadrill At Imminent Risk Of Bankruptcy... Really?
       • Dec. 15, 2014 SDRL 98 Comments

    Summary

    • Some people have suggested that Seadrill may be in imminent risk of bankruptcy but the numbers say otherwise.
    • Seadrill has a much higher debt-to-equity ratio than its peers. That is the cause of these fears.
    • The company's strong contract status provides significant visibility into its forward revenues and cash flows.
    • Seadrill generates significant operating cash flow and should be able to pay off its debt as it comes due.
    • There are still risks, but the company does not appear to be at high risk for bankruptcy at this time.
  • Seadrill And North Atlantic Drilling Discuss The Conditions In The Offshore Drilling Industry
    Dec. 9, 2014 SDRL 54 Comments

    Summary

    • Seadrill and North Atlantic Drilling consistently provide excellent analysis of the offshore drilling industry in their quarterly reports.
    • Short-term, both the ultra-deepwater floater market and the jack-up market face significant pressures but the long-term fundamentals are quite strong.
    • Over the next few years, aging rigs are likely to be scrapped which will help to relieve the current oversupply of rigs.
    • Oil companies look likely to increase their demand for the rigs over the next years.
    • The next few years are likely to be quite challenging for the companies in the offshore drilling industry.
  • North Atlantic Drilling's Results Are Much Stronger Than The Market Reaction To Them Indicates
    Dec. 3, 2014 NADL 100 Comments

    Summary

    • North Atlantic Drilling's results showed strong quarter-over-quarter and year-over-year growth, including a record EBITDA.
    • The company is well positioned for growth going forward due to the enormous amount of oil that is located off the coast of Siberia.
    • Rosneft is committed to developing its Russian reserves and North Atlantic Drilling has the most modern and capable fleet to assist in this endeavor.
    • The development timetable for these Russian reserves is somewhat uncertain.
    • North Atlantic Drilling's dividend cut was not out of necessity but was done so the company could strengthen its finances and better weather near-term headwinds.
  • First Thoughts On Seadrill's Earnings Report And Reasons Not To Panic
    Nov. 26, 2014 SDRL 136 Comments

    Summary

    • Seadrill announced earnings that were quite solid despite the company's dividend suspension.
    • Seadrill is now largely booked until the end of 2015, with only 9% availability following the awarding of four contracts from Petrobras.
    • Seadrill's dividend suspension will allow it to reduce its debt significantly going forward and thus strengthen its balance sheet.
    • The company also plans to buy back up to 10% of its current shares outstanding.
    • Despite the pain that income investors are feeling now, the suspension of the dividend was actually a very prudent decision that positions the company well for the future.
  • Chinese And Russian Demand Provides Reasons To Be Bullish On Gold
    Nov. 24, 2014 GLD 21 Comments

    Summary

    • Gold has proven a difficult asset to hold in recent months as the dollar continues to strengthen and gold prices weaken due to the pressure this exerts.
    • The actual fundamental dynamics of the market prove much more promising, however.
    • The Russian Central Bank recently increased its purchases of gold several times over.
    • The Chinese citizenry are now purchasing nearly all of the world's annual gold production and the PBOC is also likely to be a significant buyer.
    • China has opened a physical gold exchange that could prove to be a game changer.
  • Could International Support For The U.S. Dollar Be Waning?
    Nov. 24, 2014 UUP, UDN, CRUD 7 Comments

    Summary

    • The primary reason why the U.S. dollar is the reserve currency is that it is the dominant currency in the oil trade.
    • This dominance provides a source of artificial strength in the dollar as it increases demand for U.S. dollars and U.S. Treasury securities.
    • International support for this standard continues to wane as three countries recently agreed to trade oil to China in yuan and not U.S. dollars.
    • The nation of France also appears to be moving away from using the dollar as the standard currency of international trade.
    • If support for the dollar continues to fade, the U.S. would likely see rising interest rates and inflation at home.
  • Decline In Oil Prices Unlikely To Affect Linn Energy's Distribution
    Nov. 20, 2014 LINE 60 Comments

    Summary

    • Linn Energy pays its distribution by pulling oil out of the ground and selling it.
    • The stock has declined along with oil prices, likely due to fears that the distribution will be cut.
    • Linn Energy maintains a hedging program that effectively locks in a sale price for the company's oil production.
    • The company also has a significant margin of safety in its cash flows that could help it maintain the distribution.
    • Linn Energy's distribution is likely in no danger in the short-term.
  • Could Forward GDP Growth Prove More Elusive Than In The Past?
    Nov. 13, 2014 DIA, SPY, QQQ 9 Comments

    Summary

    • Nominal GDP is equal to the velocity of money times the size of the money supply and velocity has been slowing rapidly since the 1980s.
    • This means that all economic growth comes from increasing debt loads because in our financial system all money is debt.
    • The effect that each additional dollar of debt is having on GDP is diminishing.
    • At some point, the continual expansion of debt could stop having any effect on GDP or even begin reducing it.
    • This is due to the U.S. economy becoming increasingly focused on non-value adding speculative transactions instead of actually producing things that people need.
  • Pacific Drilling's Latest Results Show Company's Growth Potential And An Improved Ability To Weather Industry Downturn
       • Nov. 13, 2014 PACD 8 Comments

    Summary

    • Pacific Drilling's third quarter results showed significant quarter-over-quarter and year-over-year growth in virtually all metrics.
    • Pacific Drilling is likely to show even further growth in the fourth quarter due to the start-up of a new rig.
    • Pacific Drilling is recommending the initiation of a share buyback program pending approval by the stockholders.
    • The company is in talks for two of its three rigs that need new contracts. This could result in further growth next year if it gets these contracts.
  • Seadrill's West Vela Deal Shows The Company's Financial Flexibility
    Editors' Pick • Nov. 11, 2014 SDRL 21 Comments

    Summary

    • Seadrill is selling the West Vela ultra-deepwater drilling rig to a subsidiary of Seadrill Partners.
    • This will reduce Seadrill's debt and increase its cash position.
    • The deal will increase Seadrill's ability to maintain its dividend.
    • Seadrill's cash flow will not be significantly impacted by the deal.
  • Ensco's Q3 2014 Earnings Report Shows Company's Ability To Weather Industry Storm
    Nov. 6, 2014 ESV 6 Comments

    Summary

    • Ensco's Q3 2014 report shows significant year-over-year growth despite weakness in the industry.
    • Ensco has a large revenue backlog representing nearly nine quarters of revenue at its current level.
    • Ensco has one of the newest floater fleets in the industry and has less availability than many peers.
    • Despite the company's fundamental strength, the share price has been hammered by oil price weakness and challenging industry conditions.
  • Despite Some Risks, Pacific Drilling Could Offer Interesting Opportunity
    Nov. 1, 2014 PACD 10 Comments

    Summary

    • Pacific Drilling's stock price has gotten beaten down with the rest of the companies in the offshore drilling industry.
    • Pacific Drilling has one of the newest fleets in the industry and demand for these rigs has held up much better than for the broader ultra-deepwater fleet.
    • The company still needs to secure contracts for two new rigs in the next six months.
    • Pacific Drilling has another rig coming off contract in February 2015 that needs a replacement contract.
    • Despite these risks, the company could present an interesting opportunity for investors willing to take on the risk.
  • Tracking Utilization And Day Rate Trends In The Offshore Drilling Industry - October 2014 Edition
    Oct. 30, 2014 PACD, SDRL 10 Comments

    Summary

    • The offshore drilling industry has been hit hard with concerns about falling dayrates and utilization.
    • A closer look at the actual figures though reveals that much of this fear is misplaced.
    • Some types of rigs continue to enjoy 100% utilization.
    • Even among ultra-deepwater rigs, modern drillships have shown remarkable strength in both utilization and dayrates.
    • Hardest hit have been those older ultra-deepwater semisubmersible units.
  • Markets Are Not Considering Weakness In Middle Class
    Oct. 28, 2014 WMT 9 Comments

    Summary

    • The middle class is frequently considered to be the driving force of the American economy.
    • The middle class has less discretionary income than in the past due to the rising costs of necessities at a rate that exceeds inflation.
    • Unless this is reversed, this group will not be able to consume like they have in the past.
    • Yet, markets continue to ignore this reality and are still near all-time highs.
  • A Few Reasons To Be Cautious On ExxonMobil
    Oct. 25, 2014 XOM 32 Comments

    Summary

    • ExxonMobil has several problems which need to be corrected in the next few years.
    • The company's production levels have been steadily declining since 2009.
    • ExxonMobil is not generating enough free cash flow to finance its enormous share buyback program and dividend commitments.
    • ExxonMobil has been taking on debt to finance its dividend and share buybacks.
    • Many of ExxonMobil's forward growth projects are in Russia, which the company is pulling out of.
  • Statoil's New Gas Discovery Strengthens Company's Position To Be A Major Supplier To Growing Asian Markets
    Editors' Pick • Oct. 22, 2014 STO 11 Comments

    Summary

    • Statoil recently made its seventh major discovery in the gas-rich block 2 region offshore Tanzania.
    • Tanzania is ideally positioned to ship natural gas to Southeast Asia.
    • Several countries in Southeast Asia are likely to greatly increase their imports of natural gas over the next two to three decades.
    • Statoil has sufficient gas reserves in the country to become a major supplier to these countries.
    • The company is currently constructing the needed infrastructure to take advantage of this trend.