Glen, I've been circling this industry for a while, thinking about jumping back in. I definitely don't want to do it until I see some bottom.
This is a sector with really enormous operating leverage. From two sources. Industry's own dynamics, and oil price itself, it seems to me. IMO
Although many, many people on this forum know more about the drillers specifics than I do, lets step back and look at the forest for a minute.
The basic bull case for the sector, seems to me, is 1) the collapse of the industry from the mid 80s just about totally halted production of equipment, esp. hugely expensive and long lead time deep offshore rigs; and 2) although production keeps increasing, the level of demand, esp. from the developing world, esp FROM ASIA, has been outpacing the increases in available capacity. Esp. if one projects ahead a few years, which Oil Cos have to do.....
Now 1) remains, but 2) is in real trouble. NOT primarily because of the OPEC ceiling limit, though that hurts, because what it really means is that Saudi, Kuwati and UAE output is going up 500k - 1 mil. barrels a day. NOW, add to that the realization that --- Asia slowing may take a couple years to work through in the real economy, whenever the markets bottom. AND it is looking more and more likely that Saddam is gonna get to pump more oil. OK, through the oil for food/medicine program. But look for that to get looser and looser as a face saving way for the US to accede to the opinion of the rest of the world....
I still hear lots of denial about Asia and about Iraq. Therefore its not all in the drillers. Therefore more down. (Its true that the whole market is in denial about Asia. But unlike the money center banks, drillers were initially thought to be immune, so they are late reacting. I expect the whole market to rediscover the effects of Yen 140+, etc., at or before the end of the year.
This is gonna be the earliest ending year end rally in recent memory, my guess.
Doug |
