Oil Oil, everywhere

[SharperDingaan]

Keep in mind that oil is an intra-government currency. In the short-run, marginal cost has very little to do with it. You buy my oil, I buy your weapons is a common petro $ recycle. You support my cause, I give you my oil, etc.

 

Oil sands get developed because it is in a nations economic interest. The high cost limits the competition, ongoing technology & increased throughput lower the per barrel cost over time, & tax on the resultant economic activity exceeds the cost of temporarily subsidizing production at > market price. Same process applies to oil substitutes - shale, biofuel, solar, wind, etc.

 

Cash pays bills, not revenue. So long as market price remains > cash lifting cost there is incentive to keep producing. The P&L loss destroys the BS & continues until creditors eventually foreclose on their debt covenants, & shut the firm. Degree of leverage trumps cash cost.

 

QE is not limited to just cash, it can be done through commodities as well. An awful lot of people are benefiting from lower fuel prices, & many would argue that its economic benefit exceeds that of QE.

 

SD

 

[kfh227]

Is it possible that certain market participant (Saudis) are manipulating prices because they don't want the keystone pipeline to be green lit?  Sounds like the US Senate really wants it an Obama wants to veto it.

 

Per:

http://www.newsweek.com/boehner-survives-conservative-challenge-re-elected-us-house-speaker-297192

On the energy front, the first major bill the Republican-controlled Senate intends to pass is approval of the Canada-to-Texas Keystone XL oil pipeline.

 

I kind of expect Minor changes to Obamacare in exchange for the pipeline and the end of the republican rant for the end of Obamacare or major watering down of it.

 

Once the pipeline is in, the US will not be buying it.  It's going to get exported and increase supply which may impact "certain market participants".

 

Ya, speculation. But there are probably 10 explanation for todays oil prices and it probably is not one single answer but a blend made up of up to 10 of those reasons.

 

But this keystone pipeline, where it ends and the probable export might be reason for those certain participants to worry.  So if they can force oil prices below $80 ($50 is a bit insane) the economic feasibility behind the pipeline is less rational.

 

If the Senate passes the pipeline and Obama vetos it I think oil prices will go back up for a while.  If the pipeline is a go, I don't know what to think of my theory.  Free oil for everyone for 6 months?

 

Thoughts anyone?

[tede02]

http://www.wsj.com/articles/deep-debt-keeps-oil-firms-pumping-1420594436?mod=WSJ_hp_LEFTWhatsNewsCollection

 

This phenomenon (discussed in the above article) is similar to what Gundlach discussed except he talked about it in the context of entire countries.  The only way that a country who relies on oil revenues can increase them, when prices are falling, is to sell more oil.  Of course pumping more oil when the market is already saturated can only lead to lower prices.  Potentially a vicious cycle. 

 

The WSJ article seems to bode well for distressed debt investors like OAK. 

[Uccmal]

Is it possible that certain market participant (Saudis) are manipulating prices because they don't want the keystone pipeline to be green lit?  Sounds like the US Senate really wants it an Obama wants to veto it.

 

Per:

http://www.newsweek.com/boehner-survives-conservative-challenge-re-elected-us-house-speaker-297192

On the energy front, the first major bill the Republican-controlled Senate intends to pass is approval of the Canada-to-Texas Keystone XL oil pipeline.

 

I kind of expect Minor changes to Obamacare in exchange for the pipeline and the end of the republican rant for the end of Obamacare or major watering down of it.

 

Once the pipeline is in, the US will not be buying it.  It's going to get exported and increase supply which may impact "certain market participants".

 

Ya, speculation. But there are probably 10 explanation for todays oil prices and it probably is not one single answer but a blend made up of up to 10 of those reasons.

 

But this keystone pipeline, where it ends and the probable export might be reason for those certain participants to worry.  So if they can force oil prices below $80 ($50 is a bit insane) the economic feasibility behind the pipeline is less rational.

 

If the Senate passes the pipeline and Obama vetos it I think oil prices will go back up for a while.  If the pipeline is a go, I don't know what to think of my theory.  Free oil for everyone for 6 months?

 

Thoughts anyone?

 

As theories go, that's a good one. 

 

I am still of the camp that no one knows, and no one is really in control.  I think, ultimately that Jeremy Grantham is right.

[ni-co]

Can anybody please explain to me why oil majors like XOM and CVX move in tandem with the S&P 500 and more or less independently from crude prices? It almost seems like they'd have nothing to do with the oil industry.

 

The price for oil halved and XOM is within 15% of its all time high. I don't get it.

[rkbabang]

This article tries to make the case that oil (and its price) simply doesn't matter as much as it used to, and will matter even less in the future.

 

Consumption of oil per person has been shrinking for decades while at the same time that GDP/bbl of oil is rising dramatically. 

 

 

"energy stocks currently make up 8.9% of the total market value of the S&P 500.  Back in 1980 the corresponding figure 28.8%.  Oil was pretty much king in the 20th century, but today not so much."

 

Oil Is Fading Into History

 

[krazeenyc]

Can anybody please explain to me why oil majors like XOM and CVX move in tandem with the S&P 500 and more or less independently from crude prices? It almost seems like they'd have nothing to do with the oil industry.

 

The price for oil halved and XOM is within 15% of its all time high. I don't get it.

 

We've seen this story before. Maybe this time is different but you're going to have to prove it.

 

In 1990 the price per barrel of oil averaged $23 due to the gulf war. Over the next few years the average price fluctuated between $15-$20 -- in 1997 the price per barrel was $19. The next year Oil prices plummeted, with the average oil price at $11.91.  We had articles like these :

 

http://www.economist.com/node/188181

http://money.cnn.com/1998/11/30/economy/oilprices/

 

Sound familiar? Oil was heading to $5 a barrel. I remember hearing about how technology would leave oil worthless and useless. Funny thing we're still using oil.

 

How did Exxon Mobil do during this time? It was roughly up 350% including dividends. How did it perform during the drop between Jan 1997 to Jan 1 1999? It was up 50%. 

 

Drillers and the oil equipment companies were bloodied... just like they are now.

[kfh227]

I am starting to like the idea that all of OPEC is producing more than they claim.  They need to cut production but no country will volunteer to do so.  Or they may volunteer and change nothing.  The Saudis are sick of it and are driving prices down to hurt the other countries that have higher production costs.

 

The next OPEC meeting is in June and Saudi Arabia will demand production cuts.  If no production cuts occur they will drive prices down further as retribution.

[ni-co]

Can anybody please explain to me why oil majors like XOM and CVX move in tandem with the S&P 500 and more or less independently from crude prices? It almost seems like they'd have nothing to do with the oil industry.

 

The price for oil halved and XOM is within 15% of its all time high. I don't get it.

 

We've seen this story before. Maybe this time is different but you're going to have to prove it.

 

In 1990 the price per barrel of oil averaged $23 due to the gulf war. Over the next few years the average price fluctuated between $15-$20 -- in 1997 the price per barrel was $19. The next year Oil prices plummeted, with the average oil price at $11.91.  We had articles like these :

 

http://www.economist.com/node/188181

http://money.cnn.com/1998/11/30/economy/oilprices/

 

Sound familiar? Oil was heading to $5 a barrel. I remember hearing about how technology would leave oil worthless and useless. Funny thing we're still using oil.

 

How did Exxon Mobil do during this time? It was roughly up 350% including dividends. How did it perform during the drop between Jan 1997 to Jan 1 1999? It was up 50%. 

 

Drillers and the oil equipment companies were bloodied... just like they are now.

 

There is a big difference: margins have been squeezed for the last 10 years even with crude at USD 100. Oil majors aren't the cash cows they were in the 90s – they are slowly deteriorating. I'm not arguing that oil will be up again sometime, I'm arguing that oil majors will face serious cash flow reductions. Everybody is essentially speculating that oil is going to shoot up within a very short timespan and that oil majors can therefore keep their high dividend payout ratios.

[shhughes1116]

I am starting to like the idea that all of OPEC is producing more than they claim.  They need to cut production but no country will volunteer to do so.  Or they may volunteer and change nothing.  The Saudis are sick of it and are driving prices down to hurt the other countries that have higher production costs.

 

The next OPEC meeting is in June and Saudi Arabia will demand production cuts.  If no production cuts occur they will drive prices down further as retribution.

 

There are a lot of reasons factors that have influenced the decline in oil prices. 

 

If the issue was simply that Saudi Arabia wanted to punish other countries with higher production costs, they could have achieved a far quicker result by ramping up their domestic production.  Announcing an increase of 500k-1million bpd, in the face of weak prices, would have driven the price of oil down far faster, and further down, resulting in a far faster supply/capex response.  That is not their goal.  The Saudi's are smart.  They realize that rapid contractions in capex and exploration will result in another parabolic price increase in crude oil.  Parabolic increases and decreases in the price of crude serve as encouragement for alternative energy development, which reduces future demand for their primary export product.  Thus the Saudi's are looking for the market to set a reasonable price range that will allow producers to recoup a reasonable rate of return, while allowing a reasonable price for consumers that will discourage/slow the development of alternative energy. 

[KCLarkin]

Can anybody please explain to me why oil majors like XOM and CVX move in tandem with the S&P 500 and more or less independently from crude prices? It almost seems like they'd have nothing to do with the oil industry.

 

The price for oil halved and XOM is within 15% of its all time high. I don't get it.

 

We've seen this story before. Maybe this time is different but you're going to have to prove it.

 

In 1990 the price per barrel of oil averaged $23 due to the gulf war. Over the next few years the average price fluctuated between $15-$20 -- in 1997 the price per barrel was $19. The next year Oil prices plummeted, with the average oil price at $11.91.  We had articles like these :

 

http://www.economist.com/node/188181

http://money.cnn.com/1998/11/30/economy/oilprices/

 

Sound familiar? Oil was heading to $5 a barrel. I remember hearing about how technology would leave oil worthless and useless. Funny thing we're still using oil.

 

How did Exxon Mobil do during this time? It was roughly up 350% including dividends. How did it perform during the drop between Jan 1997 to Jan 1 1999? It was up 50%. 

 

Drillers and the oil equipment companies were bloodied... just like they are now.

 

There is a big difference: margins have been squeezed for the last 10 years even with crude at USD 100. Oil majors aren't the cash cows they were in the 90s – they are slowly deteriorating. I'm not arguing that oil will be up again sometime, I'm arguing that oil majors will face serious cash flow reductions. Everybody is essentially speculating that oil is going to shoot up within a very short timespan and that oil majors can therefore keep their high dividend payout ratios.

 

The majors are integrated oil companies. Their refining and chemical businesses give them a natural hedge against falling oil prices. They also have the cash flow to pickup distressed assets, if they become available.

 

The odds of XOM cutting the dividend in the next 5 years is surely less than zero. In other words, they will certainly raise their dividend.

 

XOM's PE ratio has been compressed because they are depleting their reserves. Depressed oil prices should make it cheaper for XOM to replace their production.

[rukawa]

http://www.wsj.com/articles/deep-debt-keeps-oil-firms-pumping-1420594436?mod=WSJ_hp_LEFTWhatsNewsCollection

 

This phenomenon (discussed in the above article) is similar to what Gundlach discussed except he talked about it in the context of entire countries.  The only way that a country who relies on oil revenues can increase them, when prices are falling, is to sell more oil.  Of course pumping more oil when the market is already saturated can only lead to lower prices.  Potentially a vicious cycle. 

 

This is basically deflation caused by debt repayment. Exactly what caused deflation during the Great Depression except this is confined to only one sector. There is however one difference...shale drillers cannot keep drilling without acquiring more debt and decline rates are high for tight oil in the first year. So the dynamics are interesting. Shale oil producers have to keep pumping oil to repay debt but cannot increase production without raising more debt. Thus production will decline probably substantially after the first year and then level out. If oil prices go down many marginal shale drillers will stop producing.

[kfh227]

krazeenyc,

 

Good post a few posts up!

 

Some stocksare cheap.  Imight go shopping tommorrow.  SD, PWE and/or XCO.

[Uccmal]

http://www.wsj.com/articles/deep-debt-keeps-oil-firms-pumping-1420594436?mod=WSJ_hp_LEFTWhatsNewsCollection

 

This phenomenon (discussed in the above article) is similar to what Gundlach discussed except he talked about it in the context of entire countries.  The only way that a country who relies on oil revenues can increase them, when prices are falling, is to sell more oil.  Of course pumping more oil when the market is already saturated can only lead to lower prices.  Potentially a vicious cycle. 

 

This is basically deflation caused by debt repayment. Exactly what caused deflation during the Great Depression except this is confined to only one sector. There is however one difference...shale drillers cannot keep drilling without acquiring more debt and decline rates are high for tight oil in the first year. So the dynamics are interesting. Shale oil producers have to keep pumping oil to repay debt but cannot increase production without raising more debt. Thus production will decline probably substantially after the first year and then level out. If oil prices go down many marginal shale drillers will stop producing.

 

The real damage is being done quickly.  No one is going to lend anyone any cash in this environment now, excepting the Suncors, the XOMs, and Chevrons of the world.  If you didn't have the money to continue drilling two months ago, you aint getting it now.  If you cant pay your drillers they will stop building your well and send their people home.  Whatever situation a company had two months ago is what they are stuck with.  Alot are going to go out of business fast, and no one is going to fill their shoes for years - lenders will be gun shy.  That is what the Saudi's are counting on. 

[krazeenyc]

I'm not suggesting oil is going to bounce back in a speedy fashion. I have no idea if it'll recover quickly enough to profit in some of these smaller names. If it does I'm sure there is profit, but I think it's quite risky. 

 

What I am saying is that the guy who has owned XOM or CHV for the last decade and plans to hold on to it for 2 more decades really doesn't care what the price of oil is going to be over the next 2-3 years. In fact, it's likely that even if XOM or CHV lose profitability in the short run, the booms and busts in oil likely benefit them over the long term as they can buy nice assets on the cheap during times of distress.

[ni-co]

I'm not suggesting oil is going to bounce back in a speedy fashion. I have no idea if it'll recover quickly enough to profit in some of these smaller names. If it does I'm sure there is profit, but I think it's quite risky. 

 

What I am saying is that the guy who has owned XOM or CHV for the last decade and plans to hold on to it for 2 more decades really doesn't care what the price of oil is going to be over the next 2-3 years. In fact, it's likely that even if XOM or CHV lose profitability in the short run, the booms and busts in oil likely benefit them over the long term as they can buy nice assets on the cheap during times of distress.

 

With this time horizon, I agree. What makes me wonder is that Mr Market – who's not known for looking several years into the future – takes this perspective with the major oil companies right now. My theory is that it has much more to do with reaching for yield than with either short or long term fundamentals.

 

The majors are integrated oil companies. Their refining and chemical businesses give them a natural hedge against falling oil prices. They also have the cash flow to pickup distressed assets, if they become available.

 

The odds of XOM cutting the dividend in the next 5 years is surely less than zero. In other words, they will certainly raise their dividend.

 

XOM's PE ratio has been compressed because they are depleting their reserves. Depressed oil prices should make it cheaper for XOM to replace their production.

 

Completely disagree with this one. How high is this "natural hedge"? 75% of XOM's business still is selling oil. If oil prices stay low or go lower for some time, something's got to give: they will either have to kill larger exploration projects or cut down their dividend or both. We'll see.

 

My bet is that XOM is not going to outperform the market for the next 1-2 years. I shorted it to hedge other portfolio long positions.

[SmallCap]

I was talking with someone who is in the oil/gas industry and he pointed out something that was interesting.

 

The extra-low prices noted for Marcellus natural gas reflects that there is more supply than the existing transport system can handle.  As transportation increases those prices won’t be so low.

The lowest price last week in the Northeast, reported by the publication, Natural Gas Intelligence, was $0.53 per mmBtu.

However, the highest price last week was $8.10.  It reflected too little transportation to supply enough natural gas to those needing it.

There is much potential natural gas demand (power plants in the winter in particular) in the Northeast U.S.

 

Also I don't know how much of an impact this will have in the NE but the Vermont Yankee nuclear plant was shut down for good the other day, after 42 years of service.  It and very old coal plants need another fuel to replace them.  Natural gas has all the advantages.

Interesting times.

[yadayada]

It seems another good reason to invest in service firms. I dont now why people bother with exploration firms, or large cap oil companies with not much upside.

[moustachio]

It seems another good reason to invest in service firms. I dont now why people bother with exploration firms, or large cap oil companies with not much upside.

 

The oil majors are barely down from their 52 week highs, but there are leveraged small caps that are now a fraction of their 52 week highs. WRES and LEG.TO are good examples of oil/gas stocks that are a fraction of their formerly high price and potentially offer high upside(along with risk). Even some stocks with no leverage have suffered some high losses. TAO.TO is an example of such a stock. It has no debt, relatively high netbacks, and a high cash position, yet trades for less than 1/2 it's 52 week high. There are plenty of other examples of oil companies that have declined a lot further, but are probably value traps IMO. LTS.TO might go bankrupt at some point in the not so distant future, and SD will probably survive in the short term, but has a business model that might make it a walking dead company if oil prices don't double from here. Both of those companies have a ton of multibagger potential, but you are highly speculating on a fairly quick return to much higher oil prices.

 

Why are service firms so attractive? At lower oil prices a very large percentage of wells will be below break even. How much business will these service companies have when drilling activity drops by 50%, 75%? At a certain oil price buying them is as much of a bet on rising oil prices as buying oil companies

 

With that said, if you could find a service firm whose sales are mostly for maintaining producing wells and not related to new drilling activity and that also trades at a substantial discount, then you would probably have a very nice investment. I don't know if such a thing exists and haven't looked for it. I think a substantial opportunity exists in oil and gas producers right now, but you have to pick the right ones. *this last paragraph added during editing before reading yadayada's next post, but after he posted.

[yadayada]

I can make the case for MCR. A 70m market cap, probably about 30-50m in net cash by the end of 2015. Almost no debt. And they have pipeline maintenance income. Plus they have exposure to LNG. If things pick up, they probably earn between 10-30m a year. It seems insane to go with an exploration firm if you can buy this at these prices, unless you have a clear edge.

 

Or HOS, net tang asset value is almost twice. They have contracts with the majors that go on for another year or two regardless where oil goes. And trading at 4x earnings if things go back to normal (average return on capital of last 10 years with current fleet). And plenty of cash to survive. Jones act functions as a moat. They also have a very new fleet, which is always a good thing if demand is down. It is probably a triple or quadruple if things pick up.

 

And you dont have to worry about wether their reserves are low cost or not. Wether they have enough money to drill new wells or not. Wether it is not some scam or not. Wether the oil is actually there.. etc.

 

Imagine some low cost large oil field is discovered somewhere, with a service firm you profit regardless if that happens or not (if they are not levered) and with very specific oil wells, you dont. You diversify, without really sacrificing much of your expected return. Plus you are protected by assets. Even if oil dries up much, they can probably liquidate their ships or digging machines at not too large discounts, and you would not lose money. Because ships and digging equipment can be used in other areas or parts of the world as well.

 

 

[Mephistopheles]

I can make the case for MCR. A 70m market cap, probably about 30-50m in net cash by the end of 2015. Almost no debt. And they have pipeline maintenance income. Plus they have exposure to LNG. If things pick up, they probably earn between 10-30m a year. It seems insane to go with an exploration firm if you can buy this at these prices, unless you have a clear edge.

 

Or HOS, net tang asset value is almost twice. They have contracts with the majors that go on for another year or two regardless where oil goes. And trading at 4x earnings if things go back to normal (average return on capital of last 10 years with current fleet). And plenty of cash to survive. Jones act functions as a moat. They also have a very new fleet, which is always a good thing if demand is down. It is probably a triple or quadruple if things pick up.

 

And you dont have to worry about wether their reserves are low cost or not. Wether they have enough money to drill new wells or not. Wether it is not some scam or not. Wether the oil is actually there.. etc.

 

Imagine some low cost large oil field is discovered somewhere, with a service firm you profit regardless if that happens or not (if they are not levered) and with very specific oil wells, you dont. You diversify, without really sacrificing much of your expected return. Plus you are protected by assets. Even if oil dries up much, they can probably liquidate their ships or digging machines at not too large discounts, and you would not lose money. Because ships and digging equipment can be used in other areas or parts of the world as well.

 

 

 

Hi yadayada, I can't seem to find the company MCR. Would you mind sharing the ticker?

[yadayada]

Macro enterprises, it is canadian.

[Mephistopheles]

Macro enterprises, it is canadian.

Thanks! Looks interesting from your comments.

[investor-man]

I can make the case for MCR. A 70m market cap, probably about 30-50m in net cash by the end of 2015. Almost no debt. And they have pipeline maintenance income. Plus they have exposure to LNG. If things pick up, they probably earn between 10-30m a year. It seems insane to go with an exploration firm if you can buy this at these prices, unless you have a clear edge.

 

Or HOS, net tang asset value is almost twice. They have contracts with the majors that go on for another year or two regardless where oil goes. And trading at 4x earnings if things go back to normal (average return on capital of last 10 years with current fleet). And plenty of cash to survive. Jones act functions as a moat. They also have a very new fleet, which is always a good thing if demand is down. It is probably a triple or quadruple if things pick up.

 

And you dont have to worry about wether their reserves are low cost or not. Wether they have enough money to drill new wells or not. Wether it is not some scam or not. Wether the oil is actually there.. etc.

 

Imagine some low cost large oil field is discovered somewhere, with a service firm you profit regardless if that happens or not (if they are not levered) and with very specific oil wells, you dont. You diversify, without really sacrificing much of your expected return. Plus you are protected by assets. Even if oil dries up much, they can probably liquidate their ships or digging machines at not too large discounts, and you would not lose money. Because ships and digging equipment can be used in other areas or parts of the world as well.

 

You forgot to mention that MCR.V also just announce buybacks within the month :)

[moustachio]

I can make the case for MCR. A 70m market cap, probably about 30-50m in net cash by the end of 2015. Almost no debt. And they have pipeline maintenance income. Plus they have exposure to LNG. If things pick up, they probably earn between 10-30m a year. It seems insane to go with an exploration firm if you can buy this at these prices, unless you have a clear edge.

 

Or HOS, net tang asset value is almost twice. They have contracts with the majors that go on for another year or two regardless where oil goes. And trading at 4x earnings if things go back to normal (average return on capital of last 10 years with current fleet). And plenty of cash to survive. Jones act functions as a moat. They also have a very new fleet, which is always a good thing if demand is down. It is probably a triple or quadruple if things pick up.

 

And you dont have to worry about wether their reserves are low cost or not. Wether they have enough money to drill new wells or not. Wether it is not some scam or not. Wether the oil is actually there.. etc.

 

Imagine some low cost large oil field is discovered somewhere, with a service firm you profit regardless if that happens or not (if they are not levered) and with very specific oil wells, you dont. You diversify, without really sacrificing much of your expected return. Plus you are protected by assets. Even if oil dries up much, they can probably liquidate their ships or digging machines at not too large discounts, and you would not lose money. Because ships and digging equipment can be used in other areas or parts of the world as well.

 

I thought about this for a while, and this is what I am thinking right now. Oil services are basically a bet on the overall health of the parts of the oil industry that they cater to, along with oil prices rising enough for there to be enough activity for service revenues. A bet on an O&G company is a bet on that specific company and oil prices rising enough for it to do well.

 

In the current oil supply/demand situation, SA(Saudi Arabia, and their close allies in OPEC) had two choices: cut or don't cut. Cutting would just make high cost production sustainable, production would increase, and in 6-12 months they would be faced with the same problem of excess supply. They would have to continually cede market share, and in the end there would be a lot of extra wells drilled because of it. There would be a lot of shale wells with their initial decline already done, so there would be a lot of sustaining extra production. So instead, they decide to not cut. They say that high cost producers need to cut, that OPEC doesn't need to cut because they are low cost. Now who are the high cost producers? Basically deep sea, shale, and oil sands. Oil sands are big operations with tons of capital sunk in, and from my limited understanding probably won't go away. That leaves deep sea and shale, and it appears to me that both of those service stocks are providing services to those parts of the oil industry.

 

The oil crash in 2008/2009 was cut relatively short because OPEC cut production, but this time is different. If SA wants to break the back of high cost producers, they may very well increase production to tighten the screws at some point. If you look at either of those companies, neither did very well in 2009 with a relatively short lived decline in oil prices. So, right now I think you are investing in industries that serve the very parts of the oil industry that OPEC is targeting. I assume MCR has significant exposure to shale, but that is somewhat of an assumption, correct me if I'm wrong. I've followed the MCR thread somewhat, but I haven't done deep research on it.

 

MCR only seemed to start to perform well when the shale boom started picking up. Look at a chart, and I think services companies probably lagged O&G companies after oil prices started going up. This recovery might be even slower. A lot of shale companies are over-leveraged, and when oil prices stay below break-even, if they stop drilling production will drop rapidly due to high production declines. That leaves these companies with low oil prices, lowered production and lower credit lines due to readjusted credit facilities due to lower oil prices. Between bankruptcies, lower cash flow, and lower credit, there will probably be a lot less activity for a while. It could be a buyer's market for services for years, while it has been a seller's market with the boom.

 

HOS is also very dependent on drilling activity. If you look at their investor presentation there are a number of slides on increased drilling, so it is pretty obvious much of their business is dependent on drilling activity. Look at the 10K from the 2009 end year and they had a rough year. If oil prices stay lower for longer, they will be in even worse shape with contracts potentially ended early and day rates plummeting. They are investing in more vessels at the same time as activity is going to drop a lot.

 

Now don't get me wrong, I think both of those are healthy companies, they will survive, and they both show value at these prices, but not as much value as you seem to think. I just think that both will have a very rough year, and they probably won't bounce back super quickly. Look at 2009 charts and financials, and then imagine low oil prices for twice as long. IMO these won't be quick multibaggers, and they will probably have cheaper entry points some time this year(along with a lot of oil companies).

 

A couple of quotes from HOS 10-K:

 

The early termination of contracts on our vessels could have an adverse effect on our operations.

 

Some of the long-term contracts for our vessels and all contracts with governmental entities and national oil companies contain early termination options in favor of the customer; however, some have early termination remedies or other provisions designed to discourage the customers from exercising such options. We cannot assure that our customers would not choose to exercise their termination rights in spite of such remedies or the threat of litigation with us. Until replacement of such business with other customers, any termination could temporarily disrupt our business or otherwise adversely affect our financial condition and results of operations. We might not be able to replace such business on economically equivalent terms.

 

from 2009 y/e 10-K

 

Our average new generation OSV dayrates for the year ended December 31, 2009 were approximately $21,000 and our average new generation OSV utilization was approximately 80%. The significant drop in the price of oil and natural gas since their peak in 2008 has increasingly affected our new generation OSV effective dayrates during 2009. OSV market conditions in the U.S. Gulf of Mexico, or GoM, have continued to deteriorate, particularly for our 200 class vessels. This vessel class has experienced an annual effective, or utilization-adjusted, dayrate decrease of over $6,500 from the year ended December 31, 2008 and spot dayrates decreased nearly 50% from the spot dayrates experienced in late-2008. The extended soft OSV market conditions in the GoM have also affected demand for our larger 240 class and 265 class OSVs. Average dayrates for these larger OSV classes decreased approximately $4,000 and effective dayrates for our 240 and 265 class vessels were down approximately $6,400 compared to the year ended December 31, 2008. The OSV demand outlook in the GoM is not expected to change in the near term based on various market indicators such as rig counts and oil and gas industry capital spending budgets for 2010. In recognition of the current and forecasted soft demand for such vessels, we elected to stack ten 200 class new generation OSVs on various dates since May 2009. During December 2009, we returned to service two of these inactive vessels and plan to unstack a third vessel during the second quarter of 2010 for deployment on long-term contracts in Latin America. However, we expect to have eight new generation OSVs stacked during 2010.