Earlier this morning, a colleague of mine was touching on the finer points of his trading strategy.
I could tell right away he was a contrarian at heart.
“If they like it, I'm staying away — and so should you,” he explained.
“Personally, I'm not buying unless the market absolutely hates it.”
Back in late 1990s, when oil was trading for $20 a barrel, the thought of $50 a barrel was ridiculed...
After watching it trade flat for nearly a decade straight, my friend was ready to go all in.
“By 2008, everyone and their sister poured into oil and the jig was up. If we hadn't made so much money, it would've ruined my day; but look hard enough, and you'll find that sweet spot — the one that makes them all cringe.”
One sector immediately comes to mind: offshore.
Let me explain...
Putting the Pieces Together
There's absolutely no question in my mind that we're going to see the U.S. offshore industry explode over the next three years.
The most obvious reason for this is oil prices are heading much higher going forward. And triple-digit crude prices will help spur offshore activity.
Yesterday, Brian Hicks explained why we'll see $150 oil as soon as next year...
He accurately pinpointed one of the most fundamental problems developing is the world's largest oil fields are in decline. And just to hammer home how critical they are to global supply, don't forget that over 90% of Saudi Arabia's production stems from only six or seven fields.
Like it or not, the days are numbered for these massive fields. And it doesn't help matters that we're no longer finding these kinds of giants.
Right now, about 4,000 smaller oil fields make up roughly half of the world's output. That gap will continue to widen — and it'll be unconventional and offshore sources that will be forced to pick up the slack.
Although this return to triple-digit crude prices may account for an increase in offshore activity, it doesn't necessarily make it public enemy number one for the market.
For that, dear reader, we can thank BP...
Prior to the BP disaster, it was hard not to be bullish on offshore drillers.
Some of you might recall the push to develop areas off the U.S. eastern coastline, or when the Department of the Interior reported Federally-closed waters located on the outer continental shelf held more than ten billion barrels of oil and forty-five trillion cubic feet of natural gas.
Things were on the up and up... until April of 2009.
Ever since the Macondo incident — which ultimately resulted in Obama's year-long drilling moratorium in the Gulf of Mexico — offshore drilling has been vilified in the media.
(The only thing that comes close to sharing its role as the bad guy is hydraulic fracturing.)
So, is it finally time to buy back into offshore?
You've heard the cliché "Time heals all wounds."
Well, I think 2013 is the year we'll finally see a resurgence in offshore drilling stocks.
For starters, any serious growth in the U.S. offshore sector will come from the Gulf of Mexico.
My colleague Jeff Siegel mentioned the complete failure by Shell to move forward with their drilling plans in the Arctic...
By the end of the decade, oil production in the Gulf is expected to top two million barrels per day. And a recent forecast by Wood Mackenzie Ltd. reports over $20 billion will be spent on development wells in the next three years.
Remember, some of those deepwater wells come with a price tag of more than $100 million — and yet activity is rapidly picking up. Royal Dutch Shell recently spent $3 billion for four ultra-deep drillships, expected to be operating by 2016.
Most people don't realize that drilling rigs are quietly showing back up in the Gulf of Mexico.
In fact, there are the same number of deepwater rigs in the Gulf waters today that there were when the BP disaster happened.
Of course, not all investments were created equal. As with every other sector, you'll find your winners, losers, and break-even players in the energy markets.
Considering many of these operators are commanding day rates of up to $450,000 — and have years of backlogged contracts — these offshore stocks could possibly be among the safer longer-term investments in your portfolio.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.