ockham

OPEC Pledge: Another Production Cut

David,

Thanks for your comment. And I must say that I agree with your points about the backlog of business and the overall trend for oil to become ever more valuable once the global economy turns around. After all, the original article where I wrote about RIG it was a BUY recommendation.

To your question, my statement about RIG is simply a reference to the fact that Transoceans deep oil drilling are generally huge CapEx projects. Thus, with oil trading in the low $40's quite a few if not all of these projects are no longer profitable. I have seen estimates that these projects require up to $70 per barrel price in order to make money. Furthermore, companies looking to drill in deep water with RIG are likely going to need to raise capital (through debt) for these hugely expensive outlays in a credit market that is sluggish at best.

So, while I agree with you that when the price of oil recovers, (which I firmly believe it will) RIG will be a great stock to own and hold. However, I stand by the fact that RIG is highly susceptible to low crude prices because companies will not rent drilling rigs from RIG if they are not going to make money for their efforts. In my eyes, its that simple. Appearantly, Mr. Market agrees as the stock is off more than 70% in the last six months (back then the price of oil was $100 more).

Does that makes sense? Agree/Disagree?


On Dec 22 02:45 PM David White wrote:

> I am curious where you came up with the statement that "RIG is especially
> susceptible to the declining price of crude." RIG has a $41B backlog
> of contracts for its rigs. It only has projected revenue of $13.5B
> for 2009. It seems like it should be almost immune to the declining
> price of crude over the short term. The crude price decline seems
> to be mediated mostly by the economic times. Most people are only
> predicting the recession to last for another year. Perhaps it will
> last another 2 years at worst (I could always be wrong). Still RIG
> should be fine. The price of crude will eventually rise because it
> is still in short supply over the long term. RIG should prosper for
> a long time to come. Do you actually have any facts to back up your
> statement?