Wednesday, June 9, 2010
In last Wednesday's essay, I highlighted how cheap the oil-services sector has become thanks to the Deepwater Horizon debacle.
In today's essay, I'm going to show you a simple system you can use for picking winners out of the wreckage...
Last month, the U.S. government slapped a moratorium on all drilling in water deeper than 500 feet. This ban, plus uncertainty about more government action, has hammered the share prices of drilling companies. Many of the offshore companies I follow – either drillers, ancillary service providers, or equipment providers – are down 30% to 40%.
The moratorium affects 33 wells. While it cost exploration companies some cash, it was a true revenue killer for the drilling companies they hire. Take drilling specialist Diamond Offshore (DO) for example. Before the ban, one of its rigs, the Ocean Monarch, was set to start work on a well off the coast of Louisiana in about one mile of water. You can add that rig to the unemployment rolls right now. Instead of a four-year deal for $440,000 per day – $160 million per year – Ocean Monarch is looking for work along with 32 other drill rigs.
In addition, the U.S. government guaranteed there won't be any long-term drilling contracts in the near future. That's a whole lot of surplus rigs waiting for work.
The key to this whole mess – and picking potential service companies to buy – is this: The Gulf of Mexico isn't the only offshore discovery in the world. It's nice to work there, because it's in the backyard of the world's largest oil consumer. But Brazil has huge offshore deposits that need to be drilled. There are several exciting new plays offshore Africa and Asia. Deepwater wells are being drilled in the Mediterranean as we speak.
Companies with international exposure should be just fine.
If an offshore oil-service company has extensive operations outside the Gulf of Mexico, it will survive. If it has all its operations in that one basin... it could be a long slog for investors.
Here's a quick "cheat sheet" for offshore service companies:
As you can see, some are more tied to the U.S. than others. Investors looking for near-term payoff should focus on those with more than 50% of operations outside the U.S. for now.
Take Tidewater for example... This company focuses on transportation. Most of its revenues come from abroad. But its shares have fallen 25% since late April. Atwood Oceanics is another company whose income should be fine. It operates rigs in Asia, Africa, and Australia. It only has limited exposure to the Gulf of Mexico, but it sold off over 30%.
If the broad stock market can find its footing, those are the companies most likely to rebound out of the wreckage.
Gold hits ALL-TIME high... spot price briefly jumps above $1,250.
Offshore driller Transocean drops another 7% yesterday on Goldman downgrade... down 50% from April high.
U.S. dollar index ends six-day winning streak... seven-month uptrend still intact (for now).