You raise some interesting points, and I think it raises some general concerns about the OSX and E&P business models. I'll excerpt from a Bryan Dutt in a recent the street.com article thestreet.com since they express it better than I can
But more importantly, and let's talk about the [exploration and production] companies and the oil services industry. They have not, at least recently, returned or earned a reasonable return on capital. Investors still vividly remember the shock they experienced in late 1997-98, when the stocks absolutely collapsed. That's very fresh in their minds, and they're not willing to go back as eagerly and as vociferously as they have in the past. It's going to be a show-me situation. Investors are going to have to believe commodity prices are going to stay up and that these companies will not overbuild and attempt to overcapitalize themselves. And, on the E&P side, they're not going to leverage up and create another disaster scenario like late 1997, early 1998. And, remember, that was only a year and a half or so ago, so investors still remember that.
As an investor I can look at TMR that is trading at probably 5 times next years earnings or less and think it is a great investment. On the other hand if you look out a few years, it is perhaps likely that natural gas supply is slightly greater than demand and marginal high-debt producers are being put into bankruptcy. In general I fear that is difficult for long term investors to make money on these, but rather only the manic-depressive Slider trading types that can exploit the cycle.
I think that it is in the OSX/E&P companies interest to utilize some restraint in building too high of a supply. To the extent that "the street" can help them develop that restraint I think that it is favorable for the industry and may give us a two to three year period where it is safe to be invested here.
Best Regards,
Area51 |
