Perhaps that is a good price, perhaps it is a conservative hedge on a company presentation to investors. No one makes a project expecting disproportional returns as a base case, IMO.
The question I have, which was asked earlier, is "Does the current state of the economy, along with weather patterns, permit the industry to replenish gas inventory to a level at which consumers might not get too hurt this winter?" There has been some industrial demand destruction, as in the case of the fertilizer business, but there has also been some very mild weather.
Irrespective of those two points, what does that mean for those GOM drillers? Do they stand a chance of getting more business at higher rates since they provide about 25% of the gas produced for consumption in the U.S.? I am personally hoping that they do. I reason that improved technologies allow companies like RDC to drill deeper and faster than other drillers, thereby reducing the total cost of the project. So far, the independent producers have picked up some production from the integrated producers. They do not want to get burned again, so this time around no one is rushing to produce like mad. That is why the oil service drilling stocks have underperformed. The question still remains, will they participate in the recovery?
In about 2.5 weeks two of the companies whose stocks I purchased, RDC and ESV, will report earnings. I have looked over the June 16, 2003, 8K filing with the SEC for ESV and in it you can see that rental rates are increasing by about 25% to 30% on the rigs that had contracts renewed and that are redeploying today. As of the date of that filing, what else has changed? Is there a chance for an upside surprise by either company? I think so, but are they also likely to suffer from the summer blues that have happened in the past? Perhaps.
Today's news in Barron's and other print media discuss the economic recovery that is pushing stocks up. Although the second half might be choppy, the question is not whether we will have a recovery, but how fast it might come, according to the articles that I read. I reason that you cannot have a recovery without additional fuel consumption, and if so, with inventories still pretty darn low, more drilling will have to be done. Whether we are a top of a cycle or not, RDC and ESV ought to be contracted as long as gas is above that $3.00-$3.50 range, which leaves plenty of room. Gas going below that is not going to happen because there is not enough of it around today to heat everyone through the winter, and until there are ample reserves, I do not think there will be a gamble on prices and production, FWIW. That, in a nutshell, is my logic. I welcome any thoughts that anyone may have. Thanks in advance. |
