Hi Steve,
It is further out in the future.
The offshore arena, which has suffered from probably the worst downturn since the mid-'80s, is on the mend. We've seen a good amount of consolidation amongst offshore drillers. We're seeing it with the logistics companies. We've seen it with some of the subsea providers as well. For example, Cameron being bought by Schlumberger [ticker: SLB]; Technip and FMC merging together. The industry has reacted to the downturn by consolidating, but also becoming more integrated and providing a kind of a one-stop solution for the oil-and-gas companies, rather than making them interface with multiple suppliers.
That's made the economics more viable in the offshore market. Now we're at a point where offshore spending is improving. The marketed utilization for deep-water rigs is going above 80%. We're not at 2013 or early-2014 levels yet, but we think that ultimately over the next several years we'll be back to that type of activity in the offshore market. We like two areas. One is the capital-equipment names, the ones that provide equipment to subsea. The largest would be TechnipFMC [FTI][. And then the second area is the offshore drillers. Our two favorites there would be Transocean [RIG] and Valaris [VAL].
Barron's: What about the shale companies? If they don't consolidate, do you see bankruptcies ahead?
West: I mean, I think we were pretty clear in our notes that they have no viable options except M&A. If we're right about productivity gains slowing and the growth becoming harder, then the capital efficiency's about to go down and returns are going to go down and they didn't really have much of a return already. That's not a good scenario for them. We think M&A creates scale, so definitely M&A is one strategy. If you are more diversified, and not just a Permian pure play, like Hess [HES], which has assets in Ghana with Exxon Mobil [XOM], probably shifting capital to more-advantaged projects would be an appropriate move. There are several companies that have other opportunities out there where they can spend on better projects.
Barron's: In five years will the U.S. be producing more oil or less from shale?
West: It's a great question. I mean, I think that the world needs that eight and a half million barrels and it's gonna need probably more, but maybe not in the near term. With all the economic fluidity right now, it's hard to say that oil demand is going up. It seems to be going down. I think we're not going to see an oil-price signal yet, but over the next 12 to 18 months, it wouldn't surprise me to see an oil-price signal that allows for more cash flow per share, allows producers to perhaps get on better footing. I think in the next two to three years, it could be higher. Five years out is a long time. So it may stagnate at some level, but probably higher than eight and a half.
Barron's: But if nobody's going to finance new projects, how do you get more shale oil?
West: That's where the oil-price signal comes in. If the oil price goes up it should allow you to spend more to create more barrels.
Barron's: Do you see oil prices rising eventually?
West: Yeah.
Barron's: To where?
West: Next year we think Brent prices will be $65, which would be about a $60 [West Texas Intermediate] price.
Barron's: And part of the reason for it going up is that you see shale production flattening?
West: Shale starts to stagnate, and OPEC remains cohesive.
Barron's: So will shale plays eventually start diminishing around the country as wells go dry?
West: I think that we've started to see a topping out of production in the Bakken and the Eagle Ford [shale-oil fields]. While we don't see them necessarily rolling over near term, they're kind of flattish -- they're not areas of increased economic growth. The Permian is very busy and will probably continue to be. The area where we're starting to see this austerity is in the Rockies right now.
Barron's: Do you see employment in oil and gas starting to flatten out or decline over the next couple of years as it becomes more apparent that the economics are no good.
West: If oil prices don't improve, then yes, but it's really more a question of oil prices.
Barron's: Are there winners in this? Do the integrated companies [like Exxon Mobil] suddenly become more interesting because they can buy land on the cheap?
West: Certainly, the ones with better returns, which would be the integrateds, do become more interesting. They can take advantage of their cost of capital to acquire assets more cheaply. I think technologically advanced oil-service companies are going to need to be used more and a Halliburton (HAL) or a Schlumberger gets an advantage here. A lot of the shale E&Ps tried to disaggregate the service industry, create a lot of competition, get pricing down, but now they're going to suffer from equipment and service quality issues. There should be a push back to the big diversified players.
Barron's: And you like Schlumberger and Halliburton?
West: We do.
Val is my portfolio's only loser. I'm thinking of doubling down - since it is so cheap and hopefully on the mend.
BWDIK'
so far not much. <smile>
Bob |
