Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: Teddy who wrote (30608)	10/11/1998 4:30:00 PM
From: Paul Angell	Read Replies (4) of 95453

Teddy, Forget TA. The brightest TA dudes in the world work or once worked at LTCM (Long Term Capital Management). Their shear brilliance and confidence led to them to convince fat cat bankers to loan them money so that they could leverage themselve 160 times. Oil is the single most important commodity in the world and to read the negative comments in the press sometimes you would think that oil and gas well drilling is a relic of the past. People should take a look outside and see all the gas guzzling pickups and suburbans. While they are at it, they should explain to us all how we are going to fly a jet or run a cargo ship on solar power. The current downturn is painful, but not nearly so bad as past busts. Companies are slimmer than they were and will use these times as an excuse to consolidate. That will generate significant value to their balance sheets when recovery inevitably occurs. It will also give them more pricing power and the structural ability to withstand the next downturn. The US economy has had a hell of run and there is a lot of uncertainty, but there are plenty of positives for this sector. The beginnings of recovery are emerging in the ASEAN countries. OPEC and some OECD oil exporting countries have made verifiable cutbacks to boost the price. There is no doubt about the current glut of land rigs in the US, but that is not a new phenomenum. It's been like that since late 80's. The big (underestimated IMHO) positive is RP ratio on natural gas in North America is 7 - 12, depending on your source. This is down from a traditional value of 17. This means only 12 years left of reserves R, at current production P. Oil and gas companies don't just produce this stuff and shove it in a big tank. People are using it for industrial power and domestic heating etc. There are a lot of concerns that there is not enough drilling taking place. There simply has to be a big upturn in gas drilling and that will probably follow a price uptrend. On mature fields: -The largest fields in the world are mature and they take a significant effort to maintain. I will grant that capital expenditures (drilling and new process equipment) may slow down, but well servicing is crucial to simply stay on a natural decline curve. (see Doug Vant's numerous posts about maintaining 75 mmbpd worldwide). There will be a slowdown in well servicing over next 2Q's, but from experience I know that that will not last long. Now explain just how DO and RIG should be valued. They have compelling valuation to most experts. Do you have a list of their contracts going forward. Don't explain why they will fall from a TA curve, that's like looking at a traffic signal in your rearview mirror. Think of the huge upside from these levels if oil prices firm up. Think about the profitability of companies if consolidation in land and shallow water GOM, goes ahead as most predict. You must appreciate that recovery could be slow but recovery is inevitable. You cannot wait for it to happen to start buying oil stocks if you want to maximize your returns. Paul.

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