NE - Noble Corporation

[FCharlie]

FCharlie,

 

Based on your research, what level do oil prices need to be at in order for oil company's to increase their offshore drilling activities? I haven't done a deep dive, but here are my concerns:

 

1. Fracking techniques seem to be improving at a fast rate, allowing companies to profitably extract at lower price levels. Fracking has been put to massive use in North America, but is only starting to be applied in much of the world. My concern is that increased fracking means the oil price will never get back into the $70+ range for more than short-term spikes.

 

2. I'm a strong believer that electric-cars are about to start ramping up the S-Curve. I think there's a strong chance that by 2025, half of all new cars will be EVs. Transportation makes up over 50% of oil demand, demand that won't be replaced by other uses.

 

3. While the sector has been impaired, I don't believe we've seen any bankruptcies yet. I feel like we need to see at least one or two to indicate a true bottom.

 

I don't know what level oil prices need to be honestly. I don't think there's a magic number. One of the largest problems for E&P companies is that they are in cash hoarding mode. Many are over leveraged and are trying to repair their balance sheets. Offshore drilling, if you believe the Diamond executives, is actually more profitable than fracking/tight oil. The problem is, the upfront costs associated with offshore are much higher, so even though over the life of the project offshore produces more cash, companies are unwilling to spend the up front cash needed to get the better returns over time. Fracking tends to be much less capital intensive to get a project going, but also tends to have significant depletion rates that you don't find in offshore drilling.

 

Another thing worth mentioning is that fracking is about 5% of the market globally. Offshore is about 25%.  Therefore, it's impossible for offshore to go away, unless there's some true disruptive technology that drives out hydrocarbons. You cite battery powered transportation but you also say it may be 2025 just to get up to half of the cars switched over. Even still, there are going to be hundreds of millions of still perfectly functioning internal combustion engine automobiles out there needing fuel. I also don't see the day that aviation fuels switch from jet fuel to battery powered.

 

More than anything I think we simply need time to pass. I think that as depletion becomes a real problem for the industry, and balance sheets are repaired, customers will come back to offshore. By that point, there should be significant scrapping of currently stacked or even operating rigs. So far, according to Noble, there have been 61 rigs scrapped this down cycle. They expect that number to double by next year. That alone may go a long way towards fixing the problems of offshore rig owners.

 

On the subject of oil prices, you say we may never see $70 oil again, but I'd encourage you to look at the budget deficits of countries like Saudi Arabia and Russia and other oil producers. They need oil higher. They have been defending market share but it's happening at the expense of their budget. I think Saudi Arabia is running a 15%+ deficit compared to GDP. That's the equivalent of the United States running a $2.8 Trillion budget deficit. It goes without saying that there is a point in time where Saudi Arabia will be forced to stop pumping as much as possible and try and get the price higher. It would be to their benefit.

[awindenberger]

The Saudi Arabia and Russia points are well taken, but the counter to that is that if SA decides to cut production to send prices into the $65-70+ range, US shale producers can ramp up their production very quickly once again. Shale production in the US took us from producing less than 6Mbpd, to almost 10Mbpd. It can ramp up extremely quickly.

 

I'm definitely interested in the off-shore space, but concerned that we haven't seen the full extent of the damage yet.

 

You mentioned that 60 rigs have been cold-stacked this year. How many total rigs are there available?

[FCharlie]

The Saudi Arabia and Russia points are well taken, but the counter to that is that if SA decides to cut production to send prices into the $65-70+ range, US shale producers can ramp up their production very quickly once again. Shale production in the US took us from producing less than 6Mbpd, to almost 10Mbpd. It can ramp up extremely quickly.

 

I'm definitely interested in the off-shore space, but concerned that we haven't seen the full extent of the damage yet.

 

You mentioned that 60 rigs have been cold-stacked this year. How many total rigs are there available?

 

 

Where do you get your statistics on shale production? Just curious

 

Deepwater rigs there are about 300 industry wide, with 170 contracted and 130 actually drilling. That's data as recent as last week from a Diamond presentation.

 

Jack ups there are 550 industry wide, with 300 under contract. That's data from last weeks Noble presentation

 

I agree we haven't seen the extent of the damage to the industry, I'm just thinking the market is already discounting the damage. By the time it's obvious things are turning up, these prices probably won't exist.

[awindenberger]

I just pulled this up off Google. Looks like it hit 4.9mbpd but is falling due to low oil prices.

 

http://fuelfix.com/blog/2016/08/22/eia-u-s-shale-oil-production-to-fall-sharply-through-2017/

[FCharlie]

4.9 mbpd sounds more like it for shale.

 

Compare 4.9 mbpd to the 25 mbpd for offshore and it helps to understand why I'm not concerned that shale production will suddenly just ramp up and crash the price. It's not a large enough market and demand will grow, absent a recession, by approx 5 mbpd over a few years anyway.

 

I saw a study that showed Saudi Arabia will run a  $448 billion deficit over the years 2014-2017 if oil remains at $50.

 

The same study says SA needs $106 oil to balance their budget. UAE needs $78 oil to balance the budget, and Kuwait needs $56

 

I think there will come a day, soon actually, when OPEC cracks under pressure and adjusts supply to force oil prices higher. Just my opinion.

 

 

[awindenberger]

4.9 mbpd sounds more like it for shale.

 

Compare 4.9 mbpd to the 25 mbpd for offshore and it helps to understand why I'm not concerned that shale production will suddenly just ramp up and crash the price. It's not a large enough market and demand will grow, absent a recession, by approx 5 mbpd over a few years anyway.

 

I saw a study that showed Saudi Arabia will run a  $448 billion deficit over the years 2014-2017 if oil remains at $50.

 

The same study says SA needs $106 oil to balance their budget. UAE needs $78 oil to balance the budget, and Kuwait needs $56

 

I think there will come a day, soon actually, when OPEC cracks under pressure and adjusts supply to force oil prices higher. Just my opinion.

 

Shale oil may currently be a smaller piece of the pie, but literally 100% of all US oil production gains over the past 10 years have come from shale oil. The tech is now being implemented around the rest of the world.

[FCharlie]

 

Shale oil may currently be a smaller piece of the pie, but literally 100% of all US oil production gains over the past 10 years have come from shale oil. The tech is now being implemented around the rest of the world.

 

Maybe so but referencing that article you just linked the analysts feel that shale would be 7.1 mbpd by 2040. I mean we're talking 24 years to increase production from 4.9 to 7.1 mbpd.  It doesn't sound like a huge threat. Worldwide, I don't know about.

 

I think the piece of the puzzle that most people are ignoring that is crucial to the story is rate of depletion across various oil producing assets. I've seen statistics saying that shale depletion rates can be as high as 70% annually. It's easier and cheaper up front to produce from shale assets but you have to replace reserves so much more quickly than offshore. I've seen estimates on deep water depletion rates as low as 3-5% annually. I am no expert in the industry, but that makes me feel like once E&P companies are in a more stable financial situation, they will target offshore again. If demand happens to be higher globally by then, they will want offshore even more.

 

All that said, I think the market is pricing in disaster already. Noble has enough cash on hand to repay all debt maturities for the next few years. I feel confident that between now and 2020 the market will have turned dramatically higher. This is one of those opportunities that I feel like you can buy a lottery ticket but with a refund policy if you are wrong. In other words, the current market price of Noble reflects all the bad things and then some. If things improve, NE doubles, triples, quadruples. If things stay bad or get worse, maybe Noble sits and sits at $5.85 for three or four years. Time will tell.

 

 

[dyow]

I see your logic here.  This sector is truly a cigar butt sector. The charts on NE, RIG, DO, ATW are pure decimation.  I likee.

 

I agree on the supply side, you can't just replace 20-25% of production so some of these guys have to survive. 

 

Some issues:

- Buying into the highest cost producers/servicer in the worst oil downturn in a generation is asking trouble....but but but anything can be a good buy at the right price.

- So what is the right price? What is the worst case intrinsic value here? I am not sure how you would figure this out here bc future contracts are gonna be based on oil prices, and there are a lot of other variables.  I am not saying it is not possible but i just don't know enough yet. 

- Demand worries me more than supply.  A surprise demand drop coming out of China or something.  I agree on EVs and don't see them as an issue near term bc these aren't stocks i would hold for the long term, i would sell on any oil pop.   

- I don't necessarily agree on saudi arabia.  They need to cut their budget instead of cutting supply.  What they are doing is not sustainable.  Idk what their plan is, if they freeze that is good for oil, but i wouldn't count on them.

 

I plan on looking into this more thanks for bringing it up.  Like you i am trying to poke holes into the thesis before i do anything, buying into this sector is tricky you have to tread carefully.

[DTEJD1997]

Hey all:

 

I forgot to mention that the much better play on NE might be to buy the DEBT if you can get it for a generous discount....

 

You are higher up the food chain...if a big enough discount, you get a great cash flow, and if a big enough discount, you get a nice capital gain when the bonds are refinanced or paid off.

[FCharlie]

I see your logic here.  This sector is truly a cigar butt sector. The charts on NE, RIG, DO, ATW are pure decimation.  I likee.

 

I agree on the supply side, you can't just replace 20-25% of production so some of these guys have to survive. 

 

Some issues:

- Buying into the highest cost producers/servicer in the worst oil downturn in a generation is asking trouble....but but but anything can be a good buy at the right price.

- So what is the right price? What is the worst case intrinsic value here? I am not sure how you would figure this out here bc future contracts are gonna be based on oil prices, and there are a lot of other variables.  I am not saying it is not possible but i just don't know enough yet. 

- Demand worries me more than supply.  A surprise demand drop coming out of China or something.  I agree on EVs and don't see them as an issue near term bc these aren't stocks i would hold for the long term, i would sell on any oil pop.   

- I don't necessarily agree on saudi arabia.  They need to cut their budget instead of cutting supply.  What they are doing is not sustainable.  Idk what their plan is, if they freeze that is good for oil, but i wouldn't count on them.

 

I plan on looking into this more thanks for bringing it up.  Like you i am trying to poke holes into the thesis before i do anything, buying into this sector is tricky you have to tread carefully.

 

What is the right price? What is the worst case intrinsic value here?  Those are great questions but as you've said there are a lot of variables so it's hard to tell.

 

I will say this. Noble only has 242 million shares outstanding. They would only need about 60 cents per share of income to justify the current $5.85 share price.  60 cents per share is only about $145 million of income. Even at a drastically reduced day rate  of $250,000 per day, NE would only need about a handful of rigs operating to come up with that level of profit.

 

There was an investor meeting recently where the CEO of Noble said that he talks to investors all the time and one of the most common things he hears is that investors feel that day rates need to be back at peak levels for the company to do well. He says it's simply not true. The company could generate plenty of cash at reduced day rates of $250,000 / day on floaters and $100,000 / day on jack ups.

 

Also, remember the dividends paid between 2011-2015 were $4.68 per share. Equally fascinating, Diamond Offshore distributed about $40 per share of dividends over an eight year period ending 2014. This industry is very capable of making money. They've just been hit with a complete shit storm of overcapacity and falling oil prices. But, that's why you can buy these things at prices that in time, people may look back and wonder how it was even possible. That's just my opinion. That's why I'm building this and Diamond Offshore into larger and larger positions every week.

 

Demand worries me as well. A recession would be a nightmare to this already decimated industry. But, I actually think it may be priced in.

 

Saudi Arabia does indeed need to cut their budget. But the same could be said for USA and almost anyone else. Will they do it? Likely they will not just as it's unlikely anyone else will. What they are doing is raising cash by selling off a minority stake in Saudi Aramco. What will they do after that? They need higher prices. They have a lot of power to control prices. I think they eventually use it to force prices higher.

 

 

 

 

[SharperDingaan]

You may want to look 'outside the box' a little more.

 

NE expects the industry to scrap an additional 61 rigs over the next year; 7% of the existing 850 (deep water + jacks) world-wide fleet, and after cold stacking whatever can be - to save costs. Much of those costs are people, and widespread layoffs amplify pessimism.

 

Accepting WEBs premise that Mr Market is Manic-Depressive; most would expect the depressive side to dominate in the face of wide spread layoff driven pessimism. Adds up to multiples compression until rigs start getting warm stacked again.

 

Metrics may indeed be cheap, but it's pretty hard to see why they wouldn't fall another 20-30% over the next year or so from current levels.

 

SD

 

 

[FCharlie]

You may want to look 'outside the box' a little more.

 

NE expects the industry to scrap an additional 61 rigs over the next year; 7% of the existing 850 (deep water + jacks) world-wide fleet, and after cold stacking whatever can be - to save costs. Much of those costs are people, and widespread layoffs amplify pessimism.

 

Accepting WEBs premise that Mr Market is Manic-Depressive; most would expect the depressive side to dominate in the face of wide spread layoff driven pessimism. Adds up to multiples compression until rigs start getting warm stacked again.

 

Metrics may indeed be cheap, but it's pretty hard to see why they wouldn't fall another 20-30% over the next year or so from current levels.

 

SD

 

I appreciate the response. I do think Mr. Market is manic-depressive. Look at the share prices of Noble and Diamond. Diamond was a $140 stock and now it's below $15. Noble was a $40 stock that's now $5.47.  If you go back and read the 2008 Diamond 10Q's and read their executive summaries, they talked about how great everything was. Unprecedented demand and record day rates. Anyone who bought anywhere north of $100 may have felt good doing so, watching Diamond rise to $140. However, anyone who hung on through the cycle  lost 85% of their share price. In a cyclical business you pay dearly for buying at a time when you feel the best and you are rewarded most for buying at a time when it feels the worst. Same idea with Noble.  You could have bought it and felt good, but keep hanging on and you've lost almost 90%

 

You mention that metrics could deteriorate and they will. We already know they will. The industry is telling us they will. Executives have told us that three out of four rigs in operation today will not get contracts when their current contracts expire. That's the type of horrifying news that drives prices down to these levels. So, knowing that metrics are all but guaranteed to continue to deteriorate, should I be concerned if day rates, or free cash flow decline from this point? I mean big picture thinking here. No one knows whats going to happen here,but we know things are going to deteriorate. Now, that said, so long as the industry doesn't go away, and I don't see how it could, we cannot be in a situation where there is more risk than reward for a long term investor. Who knows what the catalysts will be that eventually drive these stocks higher. They could be debt repurchases, debt refinancing, higher oil, acquisitions and takeovers, or maybe just time.  I just know that Warren Buffett is generally correct when he says, "If you wait for the robins, spring will be over".

 

 

[nsa122]

I think you are being overoptimistic when you say "we cannot be in a situation where there is more risk than reward for a long term investor." Many things could put further pressure on the industry...continued low oil prices/lack of offshore activity, increasing interest rates/more difficult debt markets, etc.  Those could lead to bankruptcy or companies being bought out for less than they currently trade at.

I have been looking at Diamond, rather than Noble, and I am astonished at how much they overdid it in the boom years with capital expenditures that may never be recouped, much less earn any return. I guess easy debt/low interest rates feeding a cycle.  The fact that people lent these companies money for 30 years is beyond me.  Diamond looks like they had done a good job with staying conservative until the last five years or so and then took delivery on $4B worth of rigs from 2014-2016 alone and now their total enterprise value doesn't even match what they spent on those seven rigs. If they had just sat on their hands during that time or done things a little more modestly imagine the position they'd be in today.  Instead they've got rigs that they just spent hundreds of millions of dollars on sitting idle.  Overall, the management in the industry does not seem great.  They pay lip service to awareness that they're in a cyclical industry but seem to overspend just the same.  Personally I find it an interesting industry to follow but it looks like things will get worse before they get better, and I don't see any particular management that I'd be dying to entrust my money to at this point.

[Pelagic]

You may want to look 'outside the box' a little more.

 

NE expects the industry to scrap an additional 61 rigs over the next year; 7% of the existing 850 (deep water + jacks) world-wide fleet, and after cold stacking whatever can be - to save costs. Much of those costs are people, and widespread layoffs amplify pessimism.

 

Accepting WEBs premise that Mr Market is Manic-Depressive; most would expect the depressive side to dominate in the face of wide spread layoff driven pessimism. Adds up to multiples compression until rigs start getting warm stacked again.

 

Metrics may indeed be cheap, but it's pretty hard to see why they wouldn't fall another 20-30% over the next year or so from current levels.

 

SD

I appreciate the response. I do think Mr. Market is manic-depressive. Look at the share prices of Noble and Diamond. Diamond was a $140 stock and now it's below $15. Noble was a $40 stock that's now $5.47.  If you go back and read the 2008 Diamond 10Q's and read their executive summaries, they talked about how great everything was. Unprecedented demand and record day rates. Anyone who bought anywhere north of $100 may have felt good doing so, watching Diamond rise to $140. However, anyone who hung on through the cycle  lost 85% of their share price. In a cyclical business you pay dearly for buying at a time when you feel the best and you are rewarded most for buying at a time when it feels the worst. Same idea with Noble.  You could have bought it and felt good, but keep hanging on and you've lost almost 90%

 

I wonder if using this logic it doesn't make more sense to build a basket of offshore plays rather than putting effort into a single one. Any recovery in day rates is going to affect them all, does Noble or Diamond or another player offer such a compelling discount to their peers that it makes sense to invest exclusively in that company vs. a collection of them?

[SharperDingaan]

All one need do with NE is either wait (take the risk on the robins), go long now (accept 'interim' unrealized losses), or go long now with offsetting put (no change and positive cash yield). It's most efficient to simply wait and monitor. Alternatively, look at just those drillers fracking in the major US fields.

 

Diamond might look attractive; but you have to think that after the coming write-offs, they may well have to issue a good chunk of new equity just to maintain their existing debt/equity ratio. Severe dilution looks almost certain.     

 

SD

[FCharlie]

I think you are being overoptimistic when you say "we cannot be in a situation where there is more risk than reward for a long term investor." Many things could put further pressure on the industry...continued low oil prices/lack of offshore activity, increasing interest rates/more difficult debt markets, etc.  Those could lead to bankruptcy or companies being bought out for less than they currently trade at.

I have been looking at Diamond, rather than Noble, and I am astonished at how much they overdid it in the boom years with capital expenditures that may never be recouped, much less earn any return. I guess easy debt/low interest rates feeding a cycle.  The fact that people lent these companies money for 30 years is beyond me.  Diamond looks like they had done a good job with staying conservative until the last five years or so and then took delivery on $4B worth of rigs from 2014-2016 alone and now their total enterprise value doesn't even match what they spent on those seven rigs. If they had just sat on their hands during that time or done things a little more modestly imagine the position they'd be in today.  Instead they've got rigs that they just spent hundreds of millions of dollars on sitting idle.  Overall, the management in the industry does not seem great.  They pay lip service to awareness that they're in a cyclical industry but seem to overspend just the same.  Personally I find it an interesting industry to follow but it looks like things will get worse before they get better, and I don't see any particular management that I'd be dying to entrust my money to at this point.

 

You are correct, I am being overly optimistic in that statement and thanks for pointing it out.  I think my logic there is that I don't see any chance of these companies acquiring each other. All that would do is get them more rigs and they don't need more rigs.

 

Diamond did overspend, but they also flooded shareholders with dividends. $42 per share over the eight years 2006-2014. Not as bad at capital allocation as you might think.

 

 

[nsa122]

Wrt Diamond's dividends, it is an impressive track record, and I also noted that their share count stayed essentially flat over 15 years, which is attractive as well.  But, they took on debt to pay large dividends and invest for growth at a very inopportune moment, which now has another poster raising the question of whether they will have sell equity. The amount that they spent on one rig back a few years ago could repurchase nearly a third of the market cap now.  It seems that on the balance, everyone (long-term at least) would be better off if all this debt weren't available or were much more difficult to get. For every company that uses it "well," it seems that many end up in trouble. I wish someone would ask management to comment on their thinking/actions over the past 5-8 years, rather than minutiae of the immediate present.

And wrt acquisitions, there's nothing to say that someone outside the industry might not come in and buy distressed companies.  Doesn't have to be another company in the same industry. And maybe that'll be the time for us to get interested. If you look at US banks in 08/09, a lot of wealthy/savvy investors jumped into distressed banks thinking things couldn't get worse and lost their money.   

[SharperDingaan]

Just to make the 'wait' case a little clearer

 

Assume you have $100K to put into this. Invest today @ $5.47 for 18,281 shares - say 18,000 shares

Shit happens over the year, it drops 25% to $ $4.10. The same $100K now buys 24,375 shares - say 24,000 shares

((24,375/18,281)-1)*100 = ((1/(1 - % drop))-1)*100 = 33% more

 

Sit on your arse for a year holding a $100K treasury -  and potentially make 33%

Kind of hard to resist.

 

SD

 

[FCharlie]

Just to make the 'wait' case a little clearer

 

Assume you have $100K to put into this. Invest today @ $5.47 for 18,281 shares - say 18,000 shares

Shit happens over the year, it drops 25% to $ $4.10. The same $100K now buys 24,375 shares - say 24,000 shares

((24,375/18,281)-1)*100 = ((1/(1 - % drop))-1)*100 = 33% more

 

Sit on your arse for a year holding a $100K treasury -  and potentially make 33%

Kind of hard to resist.

 

SD

 

You are right. Timing is everything. I will say that I have never, ever been able to nail a full sized position all at once at the bottom. It just doesn't happen. I have however, built giant positions during  extreme periods of negativity and done extremely well years later when I looked back. Almost every time however, the stock moved against me for some period of time before rebounding. Often times it was a 33% move or more. I expect this. It's just part of the game of being a contrarian. You are betting against the masses and you are wrong until you are right. Maybe I should learn to stay out of the way until it's obvious things have turned.... But then, in exchange for that secure feeling, I end up buying Noble at $13 and riding it up instead of accumulating way more at lower prices when everyone is dumping indiscriminately.

[Spekulatius]

Just to make the 'wait' case a little clearer

 

Assume you have $100K to put into this. Invest today @ $5.47 for 18,281 shares - say 18,000 shares

Shit happens over the year, it drops 25% to $ $4.10. The same $100K now buys 24,375 shares - say 24,000 shares

((24,375/18,281)-1)*100 = ((1/(1 - % drop))-1)*100 = 33% more

 

Sit on your arse for a year holding a $100K treasury -  and potentially make 33%

Kind of hard to resist.

 

SD

 

You are right. Timing is everything. I will say that I have never, ever been able to nail a full sized position all at once at the bottom. It just doesn't happen. I have however, built giant positions during  extreme periods of negativity and done extremely well years later when I looked back. Almost every time however, the stock moved against me for some period of time before rebounding. Often times it was a 33% move or more. I expect this. It's just part of the game of being a contrarian. You are betting against the masses and you are wrong until you are right. Maybe I should learn to stay out of the way until it's obvious things have turned.... But then, in exchange for that secure feeling, I end up buying Noble at $13 and riding it up instead of accumulating way more at lower prices when everyone is dumping indiscriminately.

 

At this point, there is no guarantee that NE will survive without restructuring, depending on how long the downturn lasts and the rig market develops. These things always seem to get way worse than anyone expects. I also second looking at debt. When owning debt at the right price, a restructuring can even be beneficial in the long run, when the debt becomes equity close to the bottom.

[dyow]

Been looking at this trying to figure out what the price of oil needs to be for these guys to get new contracts.

 

From ATW Q2 conf call:

 

Mark Brown - Seaport Global Securities LLC

 

Okay. That's helpful. And the other question I had is, some nice constructive commentary around E&P companies coming back to the table and having offshore a seat at the table if we start to see oil prices getting up in that $50 to $60 range. I was just curious if that range of oil prices where you expect to be high enough to stimulate demand, has that improved given – we had heard $60, $65, $70 in the past as that breakeven point, so I just wanted to check if you feel $50 to $60 is a range where you're pretty confident we'll see some demand come back?

 

Robert J. Saltiel - President, Chief Executive Officer & Director

 

Well, I think that breakeven number has come down as we've seen the cost of offshore drilling come down. I mean we've seen day rates fall significantly from the peak, but even over the last year, they've fallen materially. Service costs continue to come down, and we mustn't forget, because this is very important, the operators themselves have become much more efficient in terms of how they staff and staff their projects and procure their equipment and services for drilling wells. So the entire chain, supply chain, supporting offshore drilling has enabled a significant deflation of prices, and that basically – of well costs, and that lowers the breakeven price of oil that makes sense.

 

I mean keep in mind, the E&P operators are in the business of maintaining or increasing reserves and production. So eventually they have to get their drilling rigs to work and turn to the right and we think that this period of effectively not doing any offshore drilling will come to an end at some point here in the late 2016, early 2017 timeframe and we're going to start to see demand pick up from there. But in talking with clients themselves, they have shared with me the $60 number as being the number that used to be the $100 number for making decisions around some offshore investments. Now, that's not across the board. That's obviously anecdotal, but I think if we see prices move in to the mid to high $50s, I'm relatively confident that we're going to see a number of operators increase their appetite for offshore drilling.

 

$55-60 is consistent with what other offshore driller execs are saying.  But these oil guys are always optimistic and i don't trust the numbers they give.  The CEO of Schlumberger said the number was now $70 for offshore to comeback - i trust his number more.

 

Whatever the number is i don't think oil going back to $70 is unreasonable.  If demand stays steady, decline rate + low capex means it is only a matter of time. 

 

[FCharlie]

Thanks for posting this. He makes a great point when he says that E&P companies are in the business of maintaining or increasing reserves. It's wild how in a down market people forget little things like this.

 

To quote the Noble CEO: "Cash conservation is not a long term strategy"

 

Regarding the price needed to get contracts, I've seen quotes from BP saying that there are projects where they can make more money at $60 today than they could have at $100 years ago. That quote is from Diamonds investor presentation back in March which I believe the slides are still available on their website. Diamond's CEO is more recently quoted as saying "A distressed market is the mother of innovation" which is also a big piece of the puzzle people aren't talking about. Diamond's sale/leaseback of blow out preventers with GE is a good example of the industry tightening up and getting more efficient.

 

Many on here have used shale oil as a reason not to invest here. I would like for someone to show me where there is a shale driller in operation that has made tons of cash. The thing is, shale wells deplete at enormous rates. Imagine you have the option of drilling for shale with less up front cost compared to offshore, but once you begin, 50% of your reserves are gone in one year. You have to run harder and harder and drill more and more to keep up. This is why after all the billions invested in shale, it's still a tiny fraction of the global market and it's not projected to grow much over time. I even read an article recently that was pointing out that the shale industry as a whole has lost more than it's made.

 

Compare to offshore, where you can have a project that, while it costs more up front to get going, once you do get going, you only have 3-4% depletion each year. You can sit back for a long long time and make far more than you can with shale.

 

The only way to stay in business and make money long term in the oil business is to produce hydrocarbons. You have to replace reserves. You can hoard cash for a period of time, but eventually it all comes back to reserve replacement and reserve growth. After all, the old Wall Street saying says "You're either growing or your dying".   

 

There will come a day when the shareholders of E&P companies start demanding growth again. It will take time because many of these companies are over leveraged, but it will happen. The beauty of being an investor in Noble, Diamond, Atwood, and the others, is that the bad news is already known. The industry executives and analysts are already telling us that the industry is completely terrible and won't recover for perhaps four years. But, that's why you can buy these stocks at 90% off of their all time highs.  This is one of the best contrarian plays I know of right now.

[awindenberger]

Thanks for the color regarding potential oil prices that get offshore moving again. I really, really want to like this area, given how cheap it looks, but I still see too many factors keeping oil prices low. I need to do some modeling, but I believe that we are going to see accelerating installations for solar/wind projects, which, combined with a move to electric cars, will seriously impact oil demand within 10 years.

 

So I guess the question is, can enough shale oil be produced in the next ten years to cover any supply gap from conventional fields? Or not?

[dyow]

I can understand the hesitation investing in oil - a lot of people got burned in oil.  I am not an oil bull (i like nat gas much better but that is another story), but i don't think you have to be to get some exposure here. 

 

Also i don't think this is a no brainer - there are risks, you have to pick the right company and of course oil could stay lower for longer than anybody expects.  But here is why i see opportunity here:

 

- a lot of energy companies rebounded big time from the lows in jan/feb, but these stock did not, so it just makes sense to me from a risk/reward perspective to adjust some exposure at this point. 

- 20-25% of the world's oil comes from offshore.  when i learned this i was surprised how high it was.  Actually i was stunned.  I always assumed offshore was the fringe producer, and accounted for a few % points of production and that they would be out of business soon. But there is no way you can replace 20-25% in the next several years.  Some players have to survive.   

- Shale in the US is only 5% of total production, they are way too small to impact offshore.  If even they tried to ramp up production right now they can't because more than half of them are technically broke.  Solar/wind/electric cars are LT problems for oil, oil should rebound before well before that.

- Wells decline steadily in production after a couple of years.  I have seen estimates ranging from 4-6% yearly for global production.  Whatever the number is we know they decline.  So currently you have older wells declining and less new wells coming online bc of massive capex cuts.  Something has to give eventually.

- Most of the industry will go bankrupt at $45 oil, they need higher prices, so the market will eventually adjust. (I recommend you go on Schlumberger site and read the presentation transcripts where he talks about this).

- Oil price is very sensitive to slight changes in supply and demand.  A slight oversupply can cause a massive drop in price, and a slight undersupply can cause a big pop.  If there is a pop in oil (to $60-70), offshore stocks should do the best in relative terms. 

- The stock market is not cheap.  Not too many places to put your money but I still see "value" in oil.  I want more exposure to it. I could buy the commodity, but i would rather get exposure this way.

 

Also i like the leaps on NE and RIG.  They are asymmetrical bets.  Not buying the stocks or making a concentrated bet yet need to do more research.     

 

 

[awindenberger]

LEAPS are def an interesting idea.

 

Thinking through the supply decline scenario:

 

Currently we are at 96Mbod production. Lets say 20M of that is offshore. If we assume that existing fields decline at 5% annually, we see the following (assuming no new production):

 

2016: 20M

2017: 19M

2018: 18.1M

2019: 17.2M

2020: 16.3M

 

So in 4 years daily production is down close to 4Mbod, this with no investment in new production. However, my bet is that there is new deepsea production coming online from recent drilling, so the total doesn't decline as much.

 

I haven't had enough time to do a deep-dive, but maybe a combo of our thoughts can hash out something nice. The fact that these stocks are at new lows is definitely enticing.