Be honest. Has BP’s management makeover really changed your opinion about the company?
More importantly, have you let the media frenzy over offshore drilling sway your trading decisions?
If you answered yes to the latter question, I have some bad news for you.
As the anti-offshore sentiment reaches a feverish pitch, offshore stocks have taken a beating. In last Saturday’s “Weekend Edition,” you got a firsthand look at how difficult the market has been for these Gulf players. None were spared, as share prices were herded off a cliff.
Now, it’s time to buy into their panic. Here’s why…
Does offshore oil have a future?
I know there are a few people out there who don’t believe in the peak oil theory; but no matter how optimistic you are about future oil production, you can’t deny the important role that offshore oil will play in meeting future demand.
Let’s get some of the facts straight:
25% of the world’s oil production comes from just 20 oil fields.
Most of these massive fields were discovered prior to 1950 and have been producing since.
Nearly all of these fields have passed their peak production.
Another 50% of the world’s oil production comes from just 110 other fields.
The remaining production is produced by approximately 70,000 smaller fields.
The average oil field has a natural decline rate between 8%-9%.
The problem is that oil discoveries have been declining for more than four decades. Furthermore, companies are pushing further and drilling deeper than ever before.
The lack of major oil discoveries i not fiction, nor theory.
And we can’t forget the story of the Cantarell oil field, either…
The once-mighty Cantarell field used to be among the largest oil fields in the world. Discovered in 1976 by a fisherman, the death of Cantarell will eventually force Mexico to become a net oil importer. Pemex, Mexico’s state-run oil company, estimates its 2010 crude production currently averages 2.5 million barrels per day.
I can’t put it simpler than this: The world needs offshore oil.
That includes deepwater targets.
Offshore drillers: best friends
Like it or not, offshore drillers in the Gulf of Mexico have become best friends. The media fallout from the Deepwater Horizon disaster has officially lumped them all together for the public to condemn.
Today, the word offshore and oil have become synonymous with BP.
And being labeled with BP is inescapable — no matter what a specific company’s safety record says.
Recently, four oil companies have banded together to form a rapid-response system to deal with future deepwater oil spills.
ExxonMobil, Chevron, ConocoPhillips, and Royal Dutch Shell have announced they are committing $1 billion to the creation of this plan. Although $250 million bucks a pop sounds like a hefty price tag, keep in mind that as of this morning, BP has spent approximately $256 million in claims.
According to the four companies, the plan could be in place as soon as in six months from now. At that pace, it’ll just be in time for the latest drilling moratorium to be lifted.
The value of offshore stocks
Over the last two weeks, my colleague Christian DeHaemer has laid out his “Forty Rules of Trading.” If you haven’t read it yet, I suggest doing so today. His words of wisdom could save you from making a costly mistake.
Chris’s trading rules had me daydreaming this morning. Several years ago, I was at odds with myself on whether or not to buy a particular oil stock.
He said, “Well, would you be comfortable owning this stock five years or ten years down the road?”
And when nearly every energy company took a nosedive in 2008, I asked myself that question on a daily basis. At one point, back in March 2009, the price had been severely beaten down. When several readers expressed concern as the stock plummeted to $1.12, our long-term confidence prevailed.
Rather than dump our position along with everyone else, we bought. A year later, that beaten-down oil stock opened at $17.41.
The reason I’m bringing this up is because I get that same feeling when I look at offshore stocks… If you have the same outlook for oil as we do, the decision is a no-brainer.
Of course, there are other signals.
Although no single factor will make us put our hard-earned money into a stock, one indicator for us to measure the company’s value is calculating its PEG ratio. It’s a good rule of thumb to use, and one that’s helped make my readers a nice profit. The idea here is that lower the PEG ratio, the better.
Many of the offshore players in the Gulf of Mexico are trading with very attractive PEG ratios. And as you can see, the market hasn’t been too kind to them during the last three months:
All six of these stocks have a PEG ratio below 1. I don’t believe there will be a better opportunity than right now.
The moratorium is still being touted by the media, most of whom have no idea how crucial offshore production will become.
Eventually, these deepwater drillers will get back on their feet.
Until next time,
Editor, Energy and Capital