Dahlman Analyst Sees Higher Rig Rates

Sector Snap: Drillers down, but analyst bullish

National oil companies have been locking in drilling contracts in recent months while most publicly traded oil majors "have been waiting on the sidelines," analyst Omar Nokta wrote in a client note."Now, with limited availability and record high leading edge rates, they must combat declining reserves and production to satisfy stakeholder demands."

Nokta and colleagues boosted their forecasts for average drilling rates by $50,000 per day, meaning that they now expect the priciest ships, which can operate in very deep water under harsh conditions, will fetch an average of $600,000 per day over the next three years.

"We believe Transocean (RIG) stands to benefit the most from the tight deepwater market as it controls seven of the 16 ultra deepwater rigs available to market through the end 2010," Nokta wrote. "We expect the company to negotiate attractive contract terms that allow for substantial visibility deep into the next decade."

And here: Energy Sector Roundup: Oil Backs Off a Record

Major oil companies "have their backs against the wall" when it comes to getting offshore drilling contracts, according to Dahlman Rose & Co. managing director Omar Nokta.

Nokta says Brazil's national oil company, Petrobras, has aggressively locked up a significant amount of rig capacity. As a result, dayrates have been pushed to record levels.

"We expect the few deepwater rigs available during the next three years will see significant enquiry and lead to higher dayrates and contract durations," said Nokta. "We are raising our dayrate assumptions for ultra deepwater floaters (7,500-feet drilling capability or more) to $570,000/day, harsh environment ultra deepwater floaters to $600,000/day and standard 5,000-feet deepwater floaters to $475,000/day. These dayrates are $50,000/day higher than our prior forecasts."

Nokta thinks Transocean Inc. could benefit most from the tight deepwater market since it controls seven of 16 rigs available through the end of 2010.

Socratic Solitaire 2008

Fist off: long live Charlie! I'm going to weep like a little girl when he's gone. And second: thank God for Peter Boodell. He is the Plato of our time.

Peter Boodell: 2008 Wesco Shareholder Meeting: Detailed Notes.

CM: Testing, can you hear in back? Mr Denham has an announcement.

Denham: We ask you not to use your video recorders, thanks. ...

There will be a long Q&A preceded by Socratic solitaire conducted by the Chairman. Meeting is adjourned.

We now begin Q&A, starting with a long game of Socratic solitaire. During questions, do not ask what we are buying or selling. Any other question is fair game, but we don’t agree to answer them.

Jefferies Source Of Petrobras Rumors

A Bit of Upside for Deepwater Rigs

Companies Featured in This Article: Petrobras, FMC Technologies, Cameron International, Dril-Quip, Oceaneering International, Hornbeck Offshore Services, GulfMark Offshore, Tidewater, National Oilwell Varco, Repsol YPF, Hess, Transocean, Diamond Offshore

Jefferies & Co.

UNDERSCORING OUR POSITIVE ultra-deepwater thesis, a huge series of ultra-deepwater-rig awards is likely forthcoming from Petrobras, Brazil's National Oil Company (NOC), which will have positive ramifications for the deepwater-rig segment but more directly impact deepwater-service companies.

Our industry sources indicate that Petrobras is likely to announce letters of intent (LOI) to award long-term contracts for as many as 17 new-build ultra-deepwater rigs by the end of the week.

In what would be an unprecedented contract award for size, we understand that Petrobas could award LOIs (with underlying contracts of six ...

This explains why NOV was up 9% today.



Since I'm last to know and it was too late to buy NOV, I saw PBR down on the split and bought at $62.75 for a point.



It's better to be lucky than good =)

UPDATE: U.S. March Trade Deficit Narrowed More Than Forecast

Brazil is preparing to tap the biggest crude-oil discovery in the Western Hemisphere in three decades, which lies just off its Atlantic coast. Petroleo Brasileiro SA, Brazil's state oil company, is in talks with Houston-based Transocean Inc. to extend offshore drilling contracts.

Even Charlie Munger Makes Mistakes

Berkshire's Munger says investors should lower expectations.

"There will be a hell of a mess in these derivative books eventually," he said.

Munger said better accounting standards are needed and banks should not be allowed to put money into risky and complicated investments.

"These people wouldn't get away with this horrible behavior if the accountants didn't bless it," he said.

Munger said the testosterone-driven, competitive executives heading most investment banks are partly to blame for the current financial problems.

"I do not think we'd have this mess if women were running all the financial institutions," he said.

Perhaps someone should remind Mr. Munger that a woman, namely JP Morgan's Blythe Masters, invented the Credit Default Swap.

Credit default swaps were invented with collateralised debt obligations in 1995 by Blythe Masters, a 34-year Cambridge graduate who was then the head of JP Morgan’s Global Credit Derivatives group.

Ms. Masters, formerly CFO, is still on JP Morgan's executive committee and is now global head of commodities. Good timing.



I might also remind Mr. Munger of the crisis caused by a certain Helen of Troy.

Transocean: Best Company In The World

After hearing Charlie Munger trash diversification over the weekend (see here, here, and here) I increased my already overweight (14%) position in Transocean (RIG) to well over 20%. Yes she's the prettiest girl in school but with a p/e of 9 it's not clear to me that everyone knows it. Does anyone know of another company that has profit margins and return on equity in excess of 30%? Q1 Transcript.

Transocean Is Coastin'

The margin picture, however, brightened meaningfully. Field operating income margins lifted from the upper 50% range into the lower 60s. Note that this includes all revenue sources, some of which are lower-margin than drilling, so the figure is understated compared to the contract drilling margins I tend to talk about when I praise Noble's (NYSE: NE) dynasty or ENSCO International's (NYSE: ESV) excellence.

I've talked about the tax rates of some of these drillers, which vary widely due to geographic factors. Diamond Offshore (NYSE: DO) reports about the highest rate that I've seen, while the two aforementioned aces fall in the high teens. Transocean did them one better, with an effective tax rate of 15.5% -- and that included some unfavorable items. This light tax treatment helped Transocean turn out a solid 38% net income margin.

Transocean's been scoring some big contract wins in India, an exciting basin that has been overshadowed by the exploration exhilaration in places like Angola and particularly Brazil. Reliance Industries, a bit like a Petrobras (NYSE: PBR) of India (granted, Reliance has more competition vis a vis ONGC), is exploring aggressively in what's known as the KG basin, offshore India. Yesterday's announcement of a new drillship order takes Reliance's deepwater vessel commitments with Transocean up to six, with three active rigs and both vessels from Transocean's joint venture with Pacific Drilling under construction. If Reliance hits anything like Petrobras' Tupi, Jupiter, or Carioca finds, then expect the fireworks to really fly.

With 80% of deepwater drilling records, Transocean has a wide economic moat. The latest enhanced Enterprise-class drillship ordered from Daewoo costs $730 million. They already have 4 of these bad boys under construction (Discoverer Clear Leader, Discoverer Americas, Discoverer Inspiration, and the yet unnamed GSF Newbuild), each capable of drilling in 12,000 feet of water and to 40,000 feet total depth. The earliest a competitor can get one is 2011 and they would still have to pay Transocean for the patent on dual activity. This is a $50 billion company earning $4 billion a year and growing. Right behind Google (GOOG) in terms of estimated long term earnings growth.



Thursday's Options Report.

Transocean (RIG) – Sky-high earnings from the world’s largest offshore oil driller failed to patch through to any great effect to Transocean’s share price, which is .27% lower at $157.42 – about $3 off the 52-week high. While some analysts have noted that the company’s share price has already exceeded some targets, perhaps adding to the lackluster action, option traders responded in two fashions – first by appearing to sell May 145 puts and 160 calls in what could indicate an expectation of very rangebound share price activity in the coming month; then by deferring new price bets to the August contract, where we noted heavy volume in out-of-the-money calls at the August 170, 200 and 210 strikes, and selling action in 120 puts.

I'm also a fan of National Oilwell Varco (NOV). Q1 Transcript.

Warren Buffett On Peak Oil

Warren Buffett and Charlie Munger On Peak Oil.

Q29: Doug Hicks, Akron Ohio. Oil will run out this century. Considering US policy is to do nothing until last second, will we face World War III? Will oil companies go to zero?

WB: Oil won’t run out - it doesn’t work this way. At some point the daily productive capacity will level off and then start declining gradually. There is the depletion aspect and the decline curves. We are producing 86m barrels per day or so, more than ever produced. We are closer, by my calculations, to almost our productive capacity, than we have ever been. I think our surplus capacity is less, and quite a bit less, than in past. Whatever that peak is, whether 5 or 10 yrs, the world will adjust, and we will think about it. Adjustments will cause demand to taper off. I don’t know how much oil is there, but there are lots of barrels of oil in place. We never recover total potential. We may have better engineering recovery in future. It is nothing like an on and off switch. You may still have enormous political considerations to get access to avail oil since it so important. There is nothing you can do over short period of time to wean world off oil.

CM: If we get another 200 yrs of growth dispersed over the world while population goes up, all oil coal and uranium will run out so you will have to use the sun. I think there will be some pain in this process. I think it is stupid to use up hydrocarbons of world so quickly. Stupid when there are few and limited alternatives. What should we have done? We should have brought all the oil over from Middle East and put it in our ground. Are we doing it now? No. Government policy is behind in rationality. If we have prosperous civilization, we must use the sun.

WB: Charlie, what is your over/under for oil production in 25 yrs?

CM: Oil in twenty five years, down.

WB: If this is true, that is big number. China is doing 10m cars this year, so down in 25ys is significant.

Also see here, here, and here.

Technological Barriers To Carioca Field

Brazil Oil Trapped by 500-Degree Heat, Salt Barrier

Brazil's oil will be harder to develop than the Gulf of Mexico, where the deepest wells are now in production, Cline said. Exxon Mobil Corp. and Chevron Corp., the two biggest U.S. oil companies, saw diamond-crusted drill bits disintegrate and steel pipes crumple when they attempted to tap deposits beneath the Gulf's seafloor two years ago.

Uncharted Depth

Pumping oil from the Brazilian finds, parts of which are 32,000 feet (10,000 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest producing offshore well.

The obstacles will discourage development unless crude prices stay high, said Tina Vital, an analyst at Standard & Poor's in New York. U.S. oil futures, which reached a record at $119.93 a barrel in after-hours electronic trading yesterday, have jumped 81 percent in the past year.

Engineers will have to overcome temperatures that range from near freezing above the ocean floor to temperatures that can melt bismuth, used for transporting uranium rods and for shotgun shells. Layers of salt will also increase the challenge because the crystals absorb seismic waves used to pinpoint oil deposits.

Seismic Issue

``The seismic issue is important because if you don't identify the location of the oil properly, you're going to waste a lot of money when you drill the hole in the wrong spot,'' said Vital, a former Exxon engineer.

Brazil pumped 2.13 million barrels of oil a day in the last three months of 2007, more than OPEC members Angola, Libya and Algeria.

Tupi, 155 miles (250 kilometers) off Brazil's coast, may begin production by 2012, according to consulting firm Strategic Forecasting in Austin, Texas. The field may have 8 billion barrels of recoverable oil.

No start date has been set for Carioca, which Petroleo Brasileiro said will take at least three months to evaluate. A Brazilian regulator said this month the reservoir may have 33 billion barrels.

If confirmed by further drilling, the reserves will be triple the size of Alaska's Prudhoe Bay, the largest U.S. field.

Record Depth

The ocean-depth record for production was set last year by Anadarko Petroleum Corp. The company is extracting natural gas from beneath 8,960 feet of water in the Gulf of Mexico, where pressure measures 3,069 pounds per square inch, squeezing joints and tearing at seals.

``What we do at that water depth in the ocean is similar to NASA's space program, but they get to do it without any pressure trying to attack them,'' Kevin Renfro, production engineering manager at Woodlands, Texas-based Anadarko, said in a November interview.

Petrobras hasn't said how much it spent to sink wells at Tupi and Carioca. Similar drilling by Exxon and Chevron Corp. in the Gulf of Mexico cost $180 million to $200 million for each well.