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It’s not just the desperate oil majors who are willing to wade into these tricky deep waters. State-controlled oil companies see these basins as their next big money maker. Deep-sea drilling is the next frontier. And these semis will help make it happen. They have plenty of drilling to do ... in the 30 billion barrel (from early estimates) Tupi basin off of Brazil ... to Chevron’s estimated 15 billion barrel discovery in the Gulf of Mexico ... to China’s recently discovered offshore field containing perhaps 2.2 billion barrels .. plus others. These are major reservoirs. If the preliminarily estimated numbers hold up, Brazil’s Tupi would be the third largest underwater oil find ever. But there’s a fly in the ointment in all of this … costs. As I said, it’s too early to get a firm handle on costs. But I’ll tell you this much right now. It won’t be cheap. And it’s getting more expensive all the time. Petrobras (from Brazil) is hogging the word’s deepwater rigs and singlehandedly causing a shortage of these sought-after rigs. There are only 21 of them in the world. Petrobras is negotiating to lease 17 on top of what it already has to help explore its Tupi basin and nearby fields. As a result, these rigs are going way up in price. BP leased one for $480,000 per day at the beginning of the year. Now, they’re going for as much as $600,000. Shallow offshore drilling is also becoming much more expensive. For example, the company in the excerpt above said its jackup rates (jackup rigs operate in waters of 400 feet or less) in Asia went up 5 percent in the first quarter this year (compared to the fourth quarter of 2007). Then, of course, it’s costing much more to produce oil from the declining fields in the Middle East, Russia, North Sea, and here in the U.S., where oil production has become relatively expensive. There’s only one inescapable conclusion: the cost of oil production is at the beginning of a steep climb up. The high cost of deepwater drilling is a big part but not the whole story behind the high costs of future oil. Profits of $20-$30 a barrel will soon be a thing of the past. Investing in oil companies will be tantamount to betting on falling production and smaller margins. Investing in the drilling contractors makes more sense. The squeeze on offshore rigs is shaping up as a great shortage play. By the way, the name of the company whose earnings report is excerpted above is Ensco (ESV). They’re one of several very attractive offshore drilling contractors. Others include Noble (NE), Atwood (ATW), Pride (PDE) and Transocean (RIG). Their future looks bright. I can’t say the same for the big oil companies. It’s been a while since the choice as to how to make money from oil has been this clear. And how not to. Good Trading, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. [Ed. Note: With a bear market looming, it’s more important than ever to select safe investments that produce monthly dividend income. Click here to learn about Andy Gordon's INCOME service that selects the best dividend-paying stocks available.]
Death by a Thousand Pings. Just What the Market Doesn't Need.By Andrew Gordon Buy. Hold. Sell. That’s what we want to know from brokers. The small print often gets lost. It is these three words that carry a lot of power with investors. They can make stocks soar or plunge or tread water. But let’s not get carried away. Their influence goes only so far. A huge number of stocks don’t do well even when brokers favor them. I came across two data points last week. Merrill Lynch said that an average of 40 percent of the companies in the S&P 500 declined every year in the period from 1997 to 2007. And from an interview which appeared in Barron’s, the short-only fund, Seabreeze Partners, said that an average of 42 percent of companies on the New York Stock Exchange declined every year over the past two decades. Against this 40-42 percent range of declining stocks, brokerages have “sell” ratings on only five percent of the stocks they cover. In the 90’s, it was worse. It was only two percent. Such a huge disparity between what stocks actually do and the outlook of brokerages as reflected in their buy, sell, hold ratings can do nothing but harm the credibility of advice coming from the big brokerages. With this in mind, Merrill has issued new guidelines. From now on, at least 20 percent of the companies they cover must have a “sell” or “underperform” rating. I’ve never been much of an admirer of Merrill’s stock recommendations. But this is an interesting development. It could inject some much-needed realism into the company’s rating system. And if other brokerages follow suit?
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