Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: John Carragher who wrote (40914)	3/28/2005 9:07:40 AM
From: Big Dog	Read Replies (1) \| Respond to of 206321

John - Just for fun, here is the article I wrote for Raging Bull in Jan. 1999 on the topic: "SISTER ACT: Together Again" by Mike Simmons Two of John D. Rockefeller's siblings are family once again. The two old sisters, separated from the Standard Oil Trust in 1911, will enter the new millenium together with a very modern, yet not quite hyphened name -- Exxon Mobil Corp. The first glance motivation behind the reunion is cost savings. And right out the gate it is obvious they didn't spend much money coming up with the new name. Save costs they will. It would be hard not to. I have seen estimated reductions of 15-20 percent in fixed operating costs and fixed overhead. Given the size of these sisters, this could mean $2 to $3 billion annually that will now fall to the bottom line. Using the lower savings number of two billion dollars, the new combined company will save $5.5 million per day or $2.19 per barrel of oil production, based on the combined company production of 2.5 million barrels of oil per day. That’s not bad, even by Texas standards. While this savings alone could easily justify the combination, the strategic implications are far more compelling. * It creates the world's largest publicly traded company in terms of revenue and will have a combined workforce of about 127,000 before any job cuts. * It brings together two companies with combined net income in 1997 of $11.8 billion and revenue of $203 billion. * It makes Exxon Mobil the third largest oil producer in the world (including countries). * It gives the new company enormous clout and power over oil, the world's most important non-renewable commodity. While it may not seem so today, someday there WILL be a supply crunch and Exxon Mobil will be "in charge". The media's view of this mega-merger being done solely as a reaction to low oil prices is dead wrong. The timing of the merger announcement coming during the same week when oil prices hit 25-year inflation-adjusted lows, is mere coincidence. Deals like these, in a cyclical business, are done for strategic reasons and are not based on today's price of oil. However, low oil prices may have helped set the stage where such a deal could be accomplished. If oil prices were above $20, there would be public and regulator outcry. The masses are sedate and happy with gasoline selling below a buck. Just as Clinton can get by with actions that are normally criminal, as long as people are fat and happy, so can these two sisters sneak in the back door with a colossal merger that will consolidate power in the oil patch. And there is no power greater than oil power. Exxon and Mobil aren't the only two companies that see a historic opening of the merger door. BP and Amoco, Total and Fina, and several other smaller companies also are rushing to the door before it slams in their faces when oil prices move higher, as prices inevitably will. It is a cyclical business. Remember? My specialty is offshore drilling. I create and develop opportunities for drilling contractors and other investors to buy and sell offshore drilling rigs and associated assets. The drilling market is rapidly moving to a market similar to the mid-'80's, when jackup rigs in the Gulf of Mexico worked for day rates that were below direct daily operating costs, not even considering the costs of capital or debt service. While the Exxon Mobil merger may appear to diminish work prospects for offshore drilling contracts, I see just the opposite with MORE work for the drillers as a result of the merger. The smart smaller oil companies will have a unique opportunity to pick up the crumbs of the merger. The new E&P behemoth will not be able to efficiently explore and exploit smaller fields. It is likely that they will begin offering these "nuisance" properties for sale or for farmout to other companies. And this may happen quickly, since undrilled leases in the Gulf of Mexico are only valid for 5 years (10 years for deepwater) before they revert back to the U.S. government. Exxon Mobil will have bigger fish to fry and will want to shed these leases. Given low oil prices, and the "fire sale" of these leases, there should be plenty of anxious buyers that recognize value when they see it. Putting these leases in the hands of efficient operators should stimulate offshore drilling, especially in the water depths referred to as shallow water; or less than 300 feet -- jackup territory. The Exxon Mobil combination will allow the two companies to have joint access to offshore rigs now under contract. With reduced spending, some oil companies have been "running out of work" for rigs they have under multi-year contracts. The contracts with the drillers require payments, up to $200,000 per day, regardless if the rig is drilling or not. The combination will rationalize the combined drilling fleet under contract by Exxon and Mobil. This is a negative for drillers, especially the drillers with the larger deepwater rigs, as it means one less customer. And deepwater drillers don't have a lengthy customer list to begin with! My motto over the past year has become “It’s The Oil Price Stupid”. This means that oil pays the bills of every activity in the oil patch, without exception. Don’t expect drillers to earn more until more of their rigs are working, which causes the charter rates to move higher. Higher day rates equate to higher earnings, almost dollar for dollar. Only when there is the reasonable expectation that drillers will earn higher day rates will stock prices move higher. And higher day rates will NEVER come without higher oil prices. Saudi Arabia is playing tough with other producers. They are making producers “feel the pain” for a while. It’s payback time for renegade OPEC members; higher cost North Sea producers who never make production cutbacks, and Venezuela and Mexico. But a lot of the misery is being reflected in the stocks of oil service companies. The patch is viewed as dead money for now. Dead money is ''death'' to fund managers. These managers are breaking their collective young necks to squeeze out a few more percentage performance points by year-end. They can not afford to hold ANY dead money here today in light of the overall market moving so well. There are very few institutional block buyers here, but lots of sellers. The buyers may come back strong in January for a fresh go at the sector. Reduced E&P activity, the shut in of unprofitable wells and continued, if not increased, OPEC cuts will slash the supply overhang. The reunion of the two old sisters is not an overnight panic reaction to some ''new'' developments in oil prices. The mergers are more about meeting shareholder earnings expectations and consolidation of power than about any survival issues. There may be oil patch casualties in small, high-debt companies. But as sure as the sun comes up in the east, $10 oil is holding open the door of opportunity for those willing to walk the walk. These two old sisters are walking hand in hand. Copyright (c) 1999 by Mike Simmons