One of the most important trends we have seen take place in the past 20 years is the shift from cheap oil to expensive oil.
Most nations generally have had higher oil prices than the United States has had. In the United States, it has been somewhat of a national birthright to have cheap oil and derivatives like gasoline. In Turkey, Norway (a leading oil producer) and the Netherlands, consumers pay an average of more than $9 per gallon of gasoline.
As a matter of fact, much of Europe pays more than $8 a gallon.
But it doesn’t end in Europe. In Hong Kong gasoline is at the $8 level; and in Israel, most of Eastern Europe, the Baltics, South Korea, Japan and Australia, it costs $6 to $7 a gallon.
While Americans talk about how high prices have risen here, it’s important to bear in mind that the rest of the developed world is paying two to three times as much for their petroleum needs.
But the one thing the United States has that most of these other nations don’t is a significant amount of untapped and underused oil reserves. This has made the transition from the world’s biggest importer of oil to one of the leading exporters of gasoline a relatively calm process.
But its implications are huge.
Most other nations have built a lot of taxes and risk premiums into their gasoline prices, since most of their fuel is and will continue to be imported from rather unstable parts of the world.
The United States has the advantage of tapping into its own resources for oil, natural gas and their derivatives. Also, the fact that the United States has a significant amount of refining capacity helps as well.
But in the global scheme of things, beyond U.S. shores and demand, the great search for oil grows as more emerging economies increase global demand for energy on consumer and industrial levels. And many companies and state-owned enterprises are looking at the possibilities of offshore drilling.
There have been some monster finds in recent years off the coasts of Brazil and Africa. The greatest challenge was getting to the fields. Many of the wells were in extremely deep water, a kilometer or two below bit-shredding bedrock.
But now the technology is available to go after this oil, and the race is on.
While not as easy or cheap to extract, these fields are so large that they could become national and corporate treasures for decades to come, ushering in energy independence to nations that have struggled with balancing pressing internal needs with uncontrollable outside forces.
A colleague of mine and one of the top analysts in this field is Elliott Gue, editor of Energy and Income Advisor.
In a recent issue he featured an article examining the promising developments in this field:
[E]xploration and production in deepwater and harsh environment–the final frontier for major oil finds–has continued apace. In 2011 and 2012, operators announced an annual average of about 30 discoveries in water depths of at least 4,500 feet, compared to 23 in 2008-10, 16 in 2002-04 and four in 1996-98. We expect this trend to accelerate dramatically in coming decades, as producers push into ultra-deepwater and Arctic regions in search of output growth.
The industry has already invested massive sums to identify and exploit major deepwater oil fields. Over the past two years, contract drillers have ordered about 87 drillships and semisubmersible rigs capable of operating in water depths of at least 4,000 feet.
Not only does this trend reflect accelerating exploration and development in these frontier basins, but the contract drilling industry is also in the midst of a youth movement, with established players seeking to revitalize their fleets with high-specification rigs that command higher day-rates–a huge opportunity for equipment suppliers.
Despite these significant capacity additions, utilization rates for these rigs have remained elevated, as high oil prices and declining production from mature fields prompt upstream operators to ramp up offshore exploration and development. Meanwhile, the resurgence of permitting and drilling activity in the Gulf of Mexico, has further tightened the market for deepwater-rated rigs.
The supply demand-balance becomes even tighter in the ultra-deepwater segment, a category that includes rigs capable of drilling in water depths that exceed 8,000 feet. According to data from trade publication Riglogix, the utilization rate for ultra-deepwater rigs currently stands at 100 percent. Not only do the daily rates that these vessels earn continue to range between $550,000 and $650,000, but an upsurge in longer-term fixtures in the back half of 2012 also suggests that upstream operators expect the market to remain stretched….the bull market for ultra-deepwater units should support another year of solid ordering trends–a boon for well-positioned equipment providers. As the offshore discoveries of recent years reach the development stage, the industry will benefit from rising orders for subsea equipment and floating production, storage and offloading facilities (FPSO).
Elliott has found his most promising candidate to take advantage of this enormous trend in the energy sector:
Cameron International Corp’s (CAM) diverse business footprint and exposure to key secular growth trends in offshore and deepwater drilling make the stock an excellent pick for investors seeking long-term growth.
Six of Cameron International’s 11 business lines target deepwater operations, and the company holds the No. 1 or No. 2 market share in the majority of its product categories. The firm also generates about two-thirds of its sales outside North America–a favorable revenue mix given the well-documented uncertainties in that geographic market.
Cameron International operates three business segments: drilling and production systems (about 57 percent of 2012 revenue), valves and measurement (25 percent), and compression systems (18 percent). In the fourth quarter of 2012, each segmented posted double-digit revenue growth on a year-over-year basis, driving overall sales growth of 20 percent.
Order intake, a critical metric for capital equipment companies, surged to a fourth-quarter record of $3.4 billion–up 80 percent from year-ago levels. Full-year orders totaled $10.9 billion, another all-time high, eclipsing last year’s number by about 39 percent and equating to an enterprise-wide book-to-bill ratio of 1.4. At the end of 2012, Cameron International’s backlog stood at $8.6 billion, up from $6 billion at the beginning of the year.
It’s time to at least take a toehold in this field.
– GS Early