Paul: While Rigs results were below expectations, they were not all that bad. The fact that they had to repair several BOP (blow out preventors) was definitely a surprise and points to some sloppy operations. I have a feeling some heads were rolling on this one. Other than that, we knew (know) the jack-up market is in bad shape, that mid-level is weak, and that deep water still is fine (not great.) the key is that RIG has 17+ billion in free cash flow from firm contracts that is more than enough to pay off all their debt. Leon Cooperman was on the call asking why they were implementing a dividend. He wants a $4 dividend. My take is that they want to pay down debt and get the company in a situation where they will be a LT winner, no matter what happens to the price of oil.
The near term outlook on oil is difficult, but decline rates never stop. One of things I strongly believe is that the future supply of world oil is a function of the price deck. If the futures strip showed $40 oil out to the end, the world would invest to produce about 40-50 MM bbls/day. This would mean a sharp contraction of world GDP. It could happen, but in this world lots of other bad stuff is happening as well. To maintain 83-85 MM bbls of liquids per day, we need a steady price of 60-80. In that world, RIG is fine. Rig is one of my core investments for the long term
Having been a professional investors for many years, I am always amazed at the partial equilibrium view that so many take. General equilibrium theory rules the world - buts its very hard and us mortals never do it right. Actions have consequences, By the dynamic path that the world economy takes is impossible to model. At the end of the day we are left with our intuition. My two cents worth, the world economies are still in a world of hurt. We've kicked the can down the road. The US is piling up debt at the Federal level to replace the lack of growth in private debt. China has major issues that are constantly sweep under the rug. The power that be are trying to muddle through the on going deleveraging, but the price has to be paid. My crystal ball is very cloudy at the moment. It tells me to be very careful. I am betting on events with near term horizons. Like DPTR over the next few weeks. Its a gamble. But the 10% of my portfolio that I use for such things has been very good to me over the years. My core portfolio has zero mkt exposure at this time and I am 50% cash. A lesson I learned many years ago (the hard way) is that if you don't understand something, don't invest. I hate to say it, but the current market is setting up a lot of people for another big fall. Hope I'm wrong, but my intuition over the years has been pretty decent.
Risky |
