Before the private-equity nonsense struck, Transocean (RIG) was rivaling National Oilwell Varco (NOV) and Schlumberger (SLB) for king of oil service.
It should have been: Transocean has the longest contracts, the best day rates, the least leverage to North America -- essentially none -- and the best deepwater profile. Then Transocean went and did the smartest thing it could possibly do: merge with GlobalSantaFe (GSF), offering a fantastic new company to shareholders. It was a brilliant move.
Interestingly, the deal put the stock in the hands of arbs, the worst possible place to be. The arbitrage style has been bunched with so many other strategies that have been failing that if Transocean had done nothing at all, instead of bettering itself with this transaction, its stock would be much, much higher -- probably closer to $120.
You can only imagine, though, if you are an arb in lots of fields, including fixed income, and the redemptions are coming all at once and fast and furious from the funds of funds -- what are you going to sell: CDOs or Transocean?
So Transocean got tagged.
Now is the time, with oil at $73 a barrel, to buy some Transocean and take advantage of the arb throwaway. Transocean is so much cheaper than Schlumberger at $95, and it could be up gigantically as the deal draws to a conclusion and is fully funded.
I know people don't even want to touch this stuff. But I know that everyone is going to be rooting around and dusting off their oil and gas plays now that oil declined to slide into the $60s.
Transocean's the play.
Friday, August 31, 2007
Jim Cramer: Transocean's Swell
Halliburton Spin-Off Positive.
Seeing Halliburton's (NYSE: HAL) latest moves as positive steps, Zacks senior oil & gas industry analyst Sheraz Mian is keeping his Buy recommendation in place on the company. From his most recent update:
'The KBR spin-off and an increased push in the Eastern Hemisphere through a headquarters in Dubai are both positive developments. The spin-off of the high volume, low margin KBR business removes distractions, improves operational focus, and makes Halliburton a pure-play on the oilfield service market.
'We believe this will aid valuation by narrowing down, if not altogether eliminating, its valuation discount relative to Schlumberger (NYSE: SLB) and other large-cap peers. Our Buy recommendation remains unchanged as we continue to view Halliburton as a core oilfield service holding.
'Management is targeting industry-leading revenue, earnings, and returns performance metrics over the next few years, highlighting the breadth and depth of the company's oilfield franchise. Our unchanged price objective of $44 is based on 2007 P/E and EV/EBITDA [enterprise value-to-earnings before interest, taxes, depreciation and amortization] multiples of 17.0x and 9.2x, still below most of its large-cap peers.'
Thursday, August 30, 2007
Noble shares down as Chevron cancels rig early
HOUSTON, Aug 30 (Reuters) - Shares of offshore oil and gas drilling contractor Noble Corp (NE) fell more than 4 percent on Thursday after the company said Chevron Corp (CVX) put an early end to a contract for a rig in Nigeria.
In its fleet status report filed with regulators on Wednesday, Noble said Chevron had ended its contract for the "Noble Roy Butler" jackup rig about four months early.
Jackup rigs are used to drill in shallower waters.
"It had nothing to with rig performance or safety," said John Breed, a spokesman for Noble. "It allows us to market the rig four months earlier with the goal of achieving a higher dayrate in a high rig demand period worldwide."
Shares of Sugar Land, Texas-based Noble were off 3.3 percent to $49.49 in afternoon trade on the New York Stock Exchange after falling as low as $48.82.
"Early termination of Noble's jackup 'Roy Butler' in Nigeria is going to raise eyebrows (raised ours)," Tudor Pickering & Co. Securities Inc wrote in a note to clients. "Is this simply Nigeria instability or something broader? Probably former, but datapoint will bring out offshore drilling skeptics saying rig oversupply."
Noble also reported that delivery dates for four newly built rigs have been pushed back by a couple of months.
A Houston-based spokesman for Chevron was not immediately available to comment on why it canceled the contract early.
There are a number of new jackup rigs currently under construction, which has led to investor worry about those rigs flooding the market and pushing dayrates down.
The daily rate paid for use of the "Noble Roy Butler" was $129,000 to $131,000, according to a filing with the U.S. Securities and Exchange Commission.
Global oil reserves up only 1% last year
CALGARY -- Record global oil and gas profits of US$243-billion and record spending of US$401-billion have resulted in a marginal 1% increase in world oil reserves last year -- all of it coming from a 1.9-billion-barrel addition from Canada's oilsands, according to a new study.
Without Canada's contribution, 228 public oil and gas companies active globally and included in the study would have collectively produced more oil than they found, John S. Herold, a U.S.-based independent petroleum research company, and Harrison Lovegrove & Co., a global oil and gas advisory firm, said in the 2007 Global Upstream Performance Review, released yesterday.
The challenges are heating up the debate over peak oil, the report says.
"Without expressing a position on the matter, we believe that the issue has become part of the industry's long-term planning," the study says.
"If the peak oil theory is correct, and a decline in world production is imminent, a company must choose among four alternatives -- try to become a dominant participant, find a niche operational talent, harvest assets or liquidate quickly."
Wednesday, August 29, 2007
Oil Drillers: Well-Positioned for Gains
Based on the subindustry's solid relative strength, combined with favorable overall fundamentals, S&P believes the group has additional price appreciation potential. S&P's top pick in the group is Noble (NE), ranked 5-STARS (strong buy).
Tuesday, August 28, 2007
OPEC policy will hit the poorest hardest, says IEA chief
PARIS (AFP) - The head of the International Energy Agency (IEA) criticised OPEC for setting a target price of around 70 dollars per barrel, saying in an interview published Tuesday that it would hit the poorest hardest.
"The market is clearly aware that OPEC has set itself a new implicit price target or a new price band of around 70 dollars (51 euros) per barrel and that the organisation will endeavour to defend this level," Claude Mandil told Arab Oil and Gas review.
"I deplore this, because it is a factor that could, whatever people often say, weigh on world economic growth and which represents a very heavy burden for the poorest people and the poorest countries," he added.
Saturday, August 25, 2007
Getting Back Into the Water
I know the oil service sector has come a long way in the last few years and oil is at or below 70, but unless you feel there will be a world wide recession how can we pass up an industry with stocks trading at single digit multiples.
Transocean (RIG) and Noble (NE) both fit the bill with huge growth this year and next. RIG is expected to earn $11.41 next year. That is 43% growth on the bottom line from a 2007 number of $7.93. Even if I give that estimate a 20% haircut you still end up at 11x with 15% growth. This analysis is even more compelling for NE. Take a good look at these stocks if you aren't involved.
Tar Sands: The Oil Junkie's Last Fix, Part 1
For this week's article, I collaborated with energy journalist Roel Mayer, a freelance writer on earth, energy and economy, based in Canada. Roel is a keen observer on energy, and the Canadian tar sands in particular, so he was a natural research partner for this short study on the state of oil production from tar sands.
He was also the one who coined "The Law of Receding Horizons." For those who missed my previous articles on receding horizons, it is a simple concept: as the cost of energy rises, the cost of everything else made with energy (like building materials) also rises. So an energy project which was expected to be profitable when energy costs were x amount higher than today, turns out to still be uneconomical when you get there.
And the tar sands of Alberta are shaping up to be the oil industry's poster child of this phenomenon. With oil well over $60 today, the low-grade sludge called kerogen that we recover from tar sand--actually more like a putty, at room temperature, which is why I refuse to use the whitewashing term "oil sands--should be highly profitable.
But paradoxically, the impending decline of global crude oil production, which is now coming clearly into view, has led to a mad rush to produce the tar sands. And this, in turn, has led to skyrocketing costs...such that now, the real "profit" in producing the tar sands seems to be in government tax breaks, not in actual profit on the resource itself.
In fact, the Canadian tar sands operations are facing a whole host of challenges, beyond economic--so much so, that one wonders why we try to harvest them at all.
But trying we are: according to the respected energy analytics firm Wood Mackenzie (WoodMac), about $117 billion is going to be spent on the tar sands by 2015.
Let's look at some of the challenges.
In a fine demonstration of the receding horizons paradox, WoodMac issued a report in March entitled "The Cost of Playing in the Oil Sands," which showed a 55% cost increase since 2005 for a peak flowing barrel of oil derived from the tar sands.
They further noted that in 2006 alone, many of the large tar sands developers announced cost increases and project delays, as they experienced an average 32% cost increase for integrated mining projects, and a 26% increase for in situ projects.
For example, last year Shell Canada shook investors when it revealed that its Athabascan tar sands operation would cost $11 billion Canadian to expand its operation by only 100,000 barrels per day-six times the original cost estimate, which was made only about eight years earlier.
Around the same time, a research report by Merrill Lynch said the cost increase would mean that the Athabasca project would only make about a 10% return on its investment if oil were to remain at least $50 per barrel!
WoodMac analyst Conor Bint issued a clear warning about the tar sands' receding profitability horizon, saying, "Companies in the oil sands will have to control capital expenditures going forward to ensure that project breakeven prices do not exceed current levels in order to remain profitable."
And what are the cost-inflating culprits, according to Bint?
The usual litany: labor shortages and skyrocketing material costs. "With the sheer number of oil sands projects together with the future arctic pipelines and conventional oil and gas developments in Alberta, labour demands in Canada will be pushed to their limits."
Which sort of calls bullshit on their helpful tip that good project management and contractor scheduling will help keep costs in line. No doubt, you must carefully watch your labor hours when your typical field hand is pulling down "combat pay" in the six figures. But that isn't going to help you a bit when tires, steel, machines, and basic metals are all going through the roof under the crush of increasing global demand, primarily driven by Asia, and primarily due to high oil costs. For example, the price of steel is up 70% in just the last five years.
In a recent essay on the cost inflation of conventional oil projects ("Upstream Economics and the Future Oil Supply"), oil analyst Dave Cohen made the shrewd observation that "the situation presents a classic Catch-22," where "the cure for industry inflation is a slowdown in upstream activity, whereas the initial goal was to accelerate upstream development to meet growing global oil demand."
Cohen notes that the cost of finding and producing oil has outpaced the growth in the price of oil. While oil has risen about 32% since 2005, costs have increased about 79%.
Given that the cost of finding and producing conventional oil is in the neighborhood of one-fifth that of producing tar sands, this is not an investment-friendly scenario.
Naturally, the aforementioned factors are leading to questions about the long-term viability of the tar sands industry, and slowing the pace of financing for its projects.
For not only are costs rising, they're rising faster every year, across the board: for labor, materials, and energy. And in all likelihood, taxes and pollution-related costs will soon join the list.
For example, Canadian Natural Resources Ltd. said in March it wouldn't move forward with its plans to build an upgrader plant due to runaway costs, and Synenco Energy Inc. shelved its upgrader in May. Likewise, last year France's Total SA announced that it was pushing its tar sands project back by three years, again due to soaring costs for labor and materials.
"I don't think it's an anomaly," says Mark Friesen, a Calgary-based analyst at FirstEnergy Capital Corp. "I think it's an indication of how difficult the environment is. If we're not careful, more projects may end up being delayed or cancelled."
Delays are now becoming endemic to tar sands operations. Major equipment such as cokers and metallurgical towers now have waiting times of two years or more, more than double the wait of three years ago. (Now there's an obvious investment opportunity.)
A shifting landscape of taxation also dogs tar sands ambitions. The removal this year of a significant tax advantage for Canada's income trusts, which have been among the largest backers of tar sands projects, caused Canadian Oil Sands, one of the largest trusts, to post its first net loss in its 10-year history.
Friday, August 24, 2007
Investing For $100 Oil
Transocean (nyse: RIG - news - people ) also deserves a central place in your positioning for $100 oil. I have raised our buy price to $100 for RIG. Don’t be put off by the $100 per share price. Investing is a matter of percentages. If you buy 100 shares of a $25.00 stock or 25 shares of a $100.00 stock, the investment is the same. If either doubles, you will have doubled you money, regardless of how many shares you buy.
Thursday, August 23, 2007
Lehman Boosts Target Prices for Offshore Drillers, Favors Deepwater Companies
NEW YORK (AP) -- Shares of offshore drilling companies rose on Wednesday after a Lehman Brothers analyst raised price targets for several and forecast strong earnings for the sector, citing solid revenue and high demand for rig services.
Angeline Sedita estimated offshore drillers's earnings growth from 2007 to 2009 to range from 30 to 97 percent, with Rowan Cos. on the low end and Diamond Offshore Drilling Inc. on the high end.
Most offshore companies have about 55 to 70 percent of 2009 revenue locked into current contracts, Sedita noted, but there is still potential for substantial growth. Deepwater drillers, which perform drilling operations thousands of feet below the ocean floor, have the greatest potential for a rise in earnings, she said.
"We continue to favor companies with deepwater exposure given our belief of the long-term strength of the market," Sedita wrote, "and that demand will continue to outstrip rig supply, even with new rig construction."
Sedita initiated 2009 profit estimates for several companies, including Noble Corp. and Diamond Offshore, which she called "top picks." Sedita raised Diamond's price target to $125 from $103 and Noble's target to $124 from $98.
Diamond shares rose $4.38, or 4.8 percent, to $96.08 in afternoon trading. Noble shares rose $1.30, or 2.2 percent, to $59.47.
Sedita also raised Ensco International Inc.'s price target to $63 from $60; Pride International Inc.'s target to $43 from $39; and Rowan's target to $45 from $44.
Ensco shares rose $1.10, or 2 percent, to $55.81; Pride shares rose $1.45, or 4.5 percent, to $34.03; Rowan shares rose 67 cents to $36.
Lehman Brothers suspended price targets and ratings for GlobalSantaFe Corp. and TransOcean Inc., which are merging, because the firm is advising the former during the process.
GlobalSantaFe shares rose $2.29, or 3.5 percent, to $67.29; TransOcean shares rose $2.87, or 2.9 percent, to $100.86.
Saturday, August 18, 2007
Wednesday, August 15, 2007
Deepwater Pathfinder sets Nigerian deepwater record
HOUSTON -- Transocean Inc.'s ultra deepwater drillship Deepwater Pathfinder has set the record for drilling in the deepest water depth offshore Nigeria. The vessel drilled the Opukiri 1X well for Devon Energy offshore Nigeria in 2,766 m (9,075 ft) water depth.
The previous Nigerian water-depth record was 2,690 m (8,826 ft) set last year for Petrobras on the Kiniun 1X well by the Transocean ultra deepwater drillship Deepwater Discovery.
China's Dependency on Oil Imports Hits Record High in July
BEIJING -- China's dependency on crude-oil imports hit a record high of 48.8% in July on a drop in domestic oil production and record volumes coming in from abroad.
Analysts say it is inevitable that the key 50% threshold will be broken as China's efforts to increase oil output won't be enough to offset increases in crude consumption.
Tuesday, August 14, 2007
Russia's seabed flag heralds global ocean carve-up.
No firm is able to drill anywhere near the North Pole, but global warming may make the region more accessible.
Drilling group Transocean says its Discoverer Deep Seas holds the world depth record for oil and gas drilling, set in 2003 at 10,011 feet of water in the Gulf of Mexico.
"We are building four new enhanced Enterprise-class drill ships (in South Korea) that will be able to work in water depths of 12,000 feet and drill wells 40,000 feet deep," said Guy Cantwell, spokesman for Transocean.
Soros fund reports stakes in Conoco, Freeport-filing
WASHINGTON, Aug 14 (Reuters) - Billionaire investor George Soros reported in a regulatory filing on Tuesday that his fund has taken on stakes in U.S. oil major ConocoPhillips and Freeport-McMoRan Copper & Gold Inc.
Soros Fund Management reported in a filing with the U.S. Securities and Exchange Commission its holdings as of June 30, which included 432,243 shares in ConocoPhillips and 407,474 shares in Freeport-McMoRan.
Monday, August 13, 2007
Research Reports: Barron's Online
Transocean - RIG-NYSE
Buy - Price 100.40 on August 7
by Sterne Agee
After analyzing GlobalSantaFe merger terms, we have raised our ratings on both stocks from Hold to Buy. The 12-month target for RIG is 122 a share; for GSF, 81. The combined entity should earn in excess of $12 a share in '08. Given a high level of firm contract backlogs, confidence in this estimate should be higher than normal...Transocean is the dominant player in the deepwater offshore-drilling industry.
Ahead of the Bell: Oilfield Services
Jefferies Analyst Upgrades GlobalSantaFe and Transocean to "Buy" From "Hold"
NEW YORK (AP) -- A Jefferies & Co. analyst upgraded Transocean Inc. and GlobalSantaFe Corp. on Monday, saying the decline in the oilfield services providers' stocks since the companies announced a merger is overdone.
Last month, GlobalSantaFe and Transocean Inc. agreed to join forces to create the world's biggest fleet of oil rigs. These companies operate ships that oil companies use to drill for oil, as well as other oil services.
Shares of both companies are down more than 13 percent since the deal was announced. Jefferies analyst Judson E. Bailey said investors are worried that decaying credit quality could drag the economy into recession, which would stanch demand for energy.
He said while the risks have increased, the sell-off is too much. He upgraded both companies' shares to "Buy" from "Hold."
He said the $16 billion in contracts the two Houston-based companies have lined up should assure they can close the deal despite the volatility in the debt markets.
Friday, August 10, 2007
Minus Venezuela, COP Still a Buy
News reports that ConocoPhlllips is exiting its Venezuela businesses has not caused Zacks senior energy analyst Sheraz Mian to lower his Buy rating on the shares to this point. Here's why:
The $15 billion share buyback announcement, expected to be completed by year-end 2008, followed the company's exit from Venezuela. While Venezuela is no doubt a setback, we were positively surprised by the buyback program, which will effectively reduce the company's share count by almost 9%.
Our continued positive view of ConocoPhillips shares reflects the company's strong position in the politically stable OECD [Organization for Economic Cooperation and Development] markets and attractive valuation. The company has significantly strengthened its upstream portfolio through its Burlington and LUKOIL transactions and remains a premier domestic refining player.
The recent joint partnership agreement with EnCana will enhance the company's upstream and downstream prospects further. Our new target price of $90, up from $80 before, results from applying 2007 P/E [price-to-earnings] and P/CF [price-to-cash flow] multiples of 8.7x and 5.4x, respectively. These are still at discounts to the super majors.
Wednesday, August 8, 2007
Why I'm a bull.
(Fortune Magazine) -- The stunning drop in stock prices dominated the headlines for days in late July -- and not just in the business press. The major market averages in the U.S. fell approximately 5% in a week, the largest weekly decline in five years.
The steady rise in share prices that preceded the plunge contributed to investor complacency; bond buyers were not demanding enough compensation for the risks they assumed. Now fear has replaced complacency, and risk is more appropriately priced.
As a result -- and most important because I do not believe recent credit-market turmoil will derail the economy -- I view this market drop as a long overdue correction rather than the end of the bull market.
My outlook for the next 12 months has not changed. I believe there's limited downside risk in the U.S. stock market from current levels, and returns over the coming year should be in the low double digits.
One key reason is that we are enjoying steady employment growth, averaging 145,000 jobs a month so far this year, which should mitigate the effects of recent debt-market troubles and housing weakness.
In defense of my notion that the equity market is unlikely to fall sharply from current levels, I would note the following: First, bull markets do not die of old age, they die of excesses such as accelerating and above-trend economic growth, rapidly rising inflation, and interest-rate hikes from a hostile Federal Reserve.
Those excesses are simply not with us today, nor do I expect their arrival anytime soon.
Second, the current bull market has experienced no price/earnings ratio expansion -- unlike every other bull market in the past five decades. In effect, this bull market is not characterized by speculation; rather, its expansion has been restrained compared with earnings growth and the trend of inflation and bond interest rates.
Berkshire Buys More BNSF Shares
Tuesday August 7, 10:58 pm ET
By Anna Jo Bratton, Associated Press Writer
Buffett's Berkshire Hathaway Buys 1.62 Million Shares of Burlington Northern
OMAHA, Neb. (AP) -- Warren Buffett's Berkshire Hathaway Inc. bought 1.62 million shares of Burlington Northern Santa Fe Corp. in the past few days, according to a filing late Tuesday with the Securities and Exchange Commission.
The acquisition increases Berkshire's stake to 40.65 million shares -- about 11.5 percent of the Fort Worth, Texas-based railroad.
Tuesday, August 7, 2007
Ahead of the Bell: Oilfield Services.
NEW YORK (AP) -- A Calyon Securities analyst upgraded the oilfield services sector on Tuesday, saying the stocks have fallen too far.
Calyon Securities analyst Mark Urness hiked the sector to "Overweight" from "Marketweight" and upgraded a number of stocks including Baker Hughes Inc., Ensco International Inc., Halliburton Co., Oil State International Inc., Transocean Inc. and Weatherford International Inc.
Urness said fear has overcome greed. While it was only natural for prices to pull back from their peaks, an index of oilfield services companies is down 11 percent since mid-July. He said this is too far.
Investors appear to believe that the credit shocks enveloping the market are going to lead to "a dramatic slowing of the U.S. economy, eventually spreading globally and bringing down oil demand and prices," he said.
But fundamentals for the industry remain intact, he said. Economies in places like India and China continue to grow, leading to more demand for oil.
That will help these companies, which operate rigs helping energy companies extract oil and perform other services like drilling.
Monday, August 6, 2007
Oil Stocks Look Good on Overdone Selloff
Sorry, but I can't back away from the oils or the oil drillers here. They had that huge run up and now are pulling back so heavily that you have to presume that oil, the commodity, is going to the $60s. I am not buying it. I think that oil could be heading down, but this selloff is overdone. Here's why: 1. It is true that most oil companies did not grow their reserves this quarter. That's what I keep hearing is the reason for the downturn. But many did: XTO, Devon, Anadarko and Apache, for example. 2. Those who didn't grow, which includes ExxonMobil and Occidental, have to drill more. The CFO of Occidental said that to me on Friday's "Mad Money". 3. The offshore drillers in particular are acting totally nuts. Who knows where Transocean would be if it chose not to do a deal? So what's going on?...
7 Trading Ideas for Monday
5+ Consecutive Down Days: These are stocks that have closed down for five or more consecutive days and are trading above their 200-day moving average. Our research shows that stocks trading above their 200-day moving average that close down for five or more days have shown positive returns, on average, 1-day, 2-days and 1-week later. Historically, these stocks have provided traders with a significant edge.
Wednesday, August 1, 2007
Oil Hits New Record on Inventory Report
Oil Prices Rise to New Record After Government Reports Drop in Crude Inventories
NEW YORK (AP) -- Oil prices jumped to a new record Wednesday after the government reported a steep drop in crude inventories last week as refinery utilization surged.
Light, sweet crude for September delivery rose 55 cents to $78.76 a barrel on the New York Mercantile Exchange. That surpasses the previous record of $78.40, set in July 2006.