Look For The Offshore Oil Bonanza

Drill, baby, drill!  Remember that mantra from 2008?  It still has some mileage left.  The world's top 31 oil producing countries will see their best existing wells peak or decline between now and 2030.  The bad news for many oil-rich countries is that they face declining national wealth unless they get serious about exploration.

Peak Oil is looking more and more like Plateau Oil thanks to technologies that extend the life of existing wells.  Doomsayers predicting the end of civilization will have a lot of crow to eat when they wake up from their Rip Van Winkle naps to find the lights still turned on a century from now.  Bring on the fracking and horizontal drilling for wells on land.  Fracking is still an imperfect technique after five decades of widespread use but the next generation of petroleum engineers will command hefty salaries figuring out how to perfect it.

The UK is pursuing new methods for recovering unconventional offshore oil.  The U.S. should do likewise.  The main obstacles to enhanced offshore oil recovery in U.S. waters are regulatory, not technological.  The BP Deepwater Horizon blowout is now ancient history and Americans will ignore offshore permitting as long as "American Idol" keeps them preoccupied.

My only problem is finding a company capable of exploiting an offshore bonanza.  I sold out of Tidewater (TDW) a long time ago with a decent capital gain once I realized they were larding up their balance sheet with long term debt.  Their share price has been all over the map for the past year but their net income has steadily declined since 2010.  They need to shape up their finances before I will ever take a second look at going long the stock.

Full disclosure:  No position in TDW at this time.  

Financial Sarcasm Roundup for 05/14/12

Today I'll revive a tradition that I maintained a couple of years ago.  I had posted rundowns of some key business headlines about once a week.  My problem then was that my summary comments just weren't snarky enough and the titles of my posts weren't very catchy.  I may have remedied those problems by pushing up the sarcasm throttle and calling this the "Financial Sarcasm Roundup."  Let's run some headlines today with my full-blown invective and see if anyone pays attention.

The State of California is weighing in on a solar project down in the SoCal desert.  K Road Power promises that its Calico Solar plant won't get in the way of endangered tortoises and other critters.  That's not good enough for environmentalist groups but it sure is good enough for me.  I spent some idle time down in the SoCal deserts as a kid when I was forced to visit the dead branches of my family tree.  Any animal hardy enough to survive down there probably has enough survival instinct to move out of the way of bulldozers.  It's really funny that environmentalists are lobbying against a green energy project.  They don't understand that the absence of this solar project means more reliance on the fossil fuel power plants they despise so much.

JPMorgan is about to face the great cleansing fire of regulatory scrutiny for letting its prop trading (thinly disguised as yield hedging, or something) get out of hand.  Not to worry, it will all be over in a fortnight once the regulators get intimidated by the records they'll have to review.  Only one executive has been thrown under the bus so far.  Her replacement is a trader whose previous employer (Long Term Capital Management) did a great job of showing the world how geniuses with exquisite financial models can destroy investments.  The end result of the perfunctory regulatory review will not be a revival of interest in the Volcker Rule.  Insiders have too much money at stake to let a silly rule get in the way of building financial WMDs.

Yahoo hired a CEO who faked a degree in computer science.  That's the best metaphor I've seen for how they lost their early lead in search engine market share to Google.  Maybe they've been hiring people since the early 2000s who merely claim to know how to program code.

Moller-Maersk placed an order with Daewoo for the world's largest container ship.  Those wacky Danes have never shed their Viking genes.  A grand total of 18,000 TEUs worth of capacity is going to find itself idle if the global economy goes down the tubes in 2013.  Petrobras has a pretty good plan for repurposing oil tankers as drilling platforms.  Grabbing difficult oil from the seabed is the wave of the future; the pun on "wave" is intended.  I think Petrobras could make Moller-Maersk an offer for that big container ship and its planned sister ships if this whole global trade thing doesn't work out.

Full disclosure:  No positions in any companies mentioned.  

The Haiku of Finance for 03/24/12

Drill in Alaska
Old basin still has some life
Good to see action

More Seaborne Stupidity From Blueseed

I posted a while back on the Seasteading Institute's hair-brained idea for a floating city.  My criticism of the concept was focused on the impossibility of economics, defense, and sovereignty for such an enterprise.  Well, the software and venture capital geniuses behind the Seasteading concept haven't given up on their bold vision to defy physical reality.  The entrepreneurs who've never built physical infrastructure are back with a brand new application of their knowledge gaps. 

Blueseed is the latest Silicon Valley effort at making an end run around national sovereignty.  Their concept of mooring a barge in international waters would theoretically allow high tech workers with H-1B visas to commute to jobs in Silicon Valley without revisions to U.S. immigration laws that otherwise limit foreign residency.  It's a less ambitious concept than Seasteading but it still has practical problems. 

Let's say they moor this thing "twelve miles southwest of San Francisco Bay" as the Huffington Post article says they will.  What ferry terminals are in that area that will enable the offshore residents to get from the barge to land transportation links into Silicon Valley?  A quick look at a Google map shows us that the closest feasible landing point for any ferry from such an area would be Half Moon Bay, because it's the only town of any size with a road link into Silicon Valley (Highway 92 to Highway 35 to CA-280 or US 101) and potential for berthing ferry ships.  Ferrying people twelve miles from a barge to the relatively shallow waters of Half Moon Bay is logistically feasible.  I have taken several ferry rides across Victoria Harbor in Hong Kong, including a long ferry all the way to Lantau Island.  Ferrys and hydrofoils were quite active along a distance comparable to the one Blueseed proposes to transit.  The feasibility of this concept will depend very much on the construction of an adequate ferry terminal in Half Moon Bay.  I've been to Half Moon Bay many times; the waterfront there can probably accommodate a ferry berth approximately half a kilometer south of the existing marinas.  Blueseed will have to build a brand new pier, roads, bus terminals, and parking lots to enable ground transportation links for disembarking ferry passengers.  The article's admission that "it hasn't been determined exactly which port Blueseed would use" is an understatement.

The page for concept vessels once again shows a glaring ignorance of logistics.  The residential barge has containers stacked up on one end, but there is no sufficient room for material handling equipment on deck to maneuver said containers into a storage area for offloading.  That's just as well, because the warehousing area appears to be nonexistent.  There's one photo of a passing containership offloading containers onto the barge with its own onboard crane.  That's pretty funny.  How much do they plan to pay for regular replenishment from a fully-loaded container ship that's on its way to Hong Kong?  I am not aware of any attempt ever in human history to offload a TEU container on the high seas from ship to ship.  Underway replenishment between ships is done by many navies but this involves a conveyor system hanging between ships for bundles and palletized loads.  Blueseed needs to ask the U.S. Navy how it resupplies ships at sea so they can see how challenging it will be. 

The article mentions that a "live-work space" on the barge will cost $1200 per month.  That's hilarious.  A one-bedroom apartment in San Francisco costs $1500 per month, in a city with a fully mature civil infrastructure that delivers energy, water, and goods in and waste out.  Doing those things at sea will cost a premium.  The MBA geniuses running the cost estimates need to at least triple that $1200 estimate for a conservative number, then ask themselves how many H-1B visa computer engineers can afford to pay that rent on Silicon Valley startup compensation levels. 

The existing leadership of Blueseed makes me wonder about execution.  They are all ex-Seasteaders with plenty of entrepreneurial zeal and zero experience in maritime engineering, civil engineering, mass transit, or other relevant disciplines.  I do respect their selection of Max Hardberger as a technical advisor.  If anyone could pull off a radically new seagoing concept, this guy can.  I heard him speak about his adventures at the Golden Gate Breakfast Club.  There needs to be an adult in the room among all of these wide-eyed kids with MBAs and law degrees.  I suspect Max is going to end up laughing all the way to the bank as he tells these kids week after week what the sea won't allow them to do. 

I think it's okay that rich Silicon Valley Internet entrepreneurs want to keep trying to secede from reality.  They're welcome to do so with their own money.  They should not approach the taxpayers of Northern California towns to subsidize this tomfoolery.  I truly believe that business leaders should spend time and money promoting pro-business immigration policy instead of residential sea barge folly. 

Tidewater's Worsening Prospects In Fall 2011

I was reluctant to exit my position in Tidewater (TDW) a few months ago when I realized their balance sheet no longer had the strength I preferred (i.e., long-term debt should be less than twice net income).  I am even more grateful now that I made that call.  Tidewater has released pessimistic expectations for this quarter's revenue.  I guess their strong market position doesn't translate into pricing power.  Recent weakness in the price of oil probably doesn't help make offshore drilling projects desirable, and that's Tidewater's bread and butter. 

Full disclosure:  No position in TDW at the present time. 

Initial Design Photo Of Seasteading City Demands Ridicule

Two days ago I posted some mild criticisms of the Seasteading Institute's floating city plan.  Now I'm adding more fuel to my fire.  This article displays a concept model of this artificial island for billionaires.  I'll republish the photo below.

Do you see something wrong here?  Check this out.  That's a container ship parked next to an offshore platform.  The offshore platform has no cranes, no piers, no material handling equipment, or anything else that is absolutely required to make an economically viable effort at getting those containerized goods off the ship and into the hands of the platform's wealthy denizens.  Seasteaders need a crash course in supply chain management.  They should hire me as a consultant.  I'll raise my rates just for them so they can brag about paying top dollar for advice. 

I'll offer yet another item to my litany of nonviability.  This city-state has no way to feed itself.  You can't live without food no matter how many billions you have in your Swiss account or how fast your satellite broadband connection zips around the world.  Are they going to have dedicated fishing fleets prowling local waters?  A steady diet of nothing but cod, tuna, and king crab will bore these urban transplants to death in no time.  Most American city supermarkets require replenishment every few days, depending on inventory turnover and spoilage.  How many supermarkets can fit on a floating platform?  I'm guessing just one, and it will be about the size of a typical Trader Joe's in San Francisco. How will it be supplied?  Remember, there are no plans yet for the cranes and dock space necessary to make any trade in goods, let alone food imports, physically possible.  Maybe Whole Foods can deliver risotto by airdrop (*snicker*). 

I've figured out the mentality behind this effort.  It's a stab at creating a gated community to reflect the exclusive status the creators of this stupidity feel they deserve.  The thing about gated communities on land is that they're already connected to the infrastructure for energy, water, waste disposal, and transport that makes them livable.  There won't be enough space on an ocean-going platform to make all of that possible.  Check out the cramped quarters on an aircraft carrier for the only existing model of how thousands of people can live at sea.  Note that the carrier needs to replenish its nuclear reactor's fuel every few years (in drydock, on land, which will negate our seasteaders sovereignty!) and is never self-sufficient in food or material goods.  The carrier's residents have little personal space, let alone enough space for a hundred billionaire condos.  The mentality of rich folks who expect Jeeves to rush into the parlor with a cocktail every time they ring a silver bell from Tiffany's doesn't transplant to a cramped offshore platform.  Some rich people apparently aren't satisfied with seceding from society; they want to secede from reality as well. 

Have at it, seasteaders.  You'll never get off dry land.  Oh, if you need some more material for future designs, look no further than fiction.

Here's a final bit of free advice.  Focus these platforms on fulfilling an unmet need for energy production from waves, tides, and offshore windfarms and you'll have an excuse to park them within sight of the shore.  Proximity to shore means you can build causeways wide enough for trucks or trams and not worry about the lack of space for containerized trade I mentioned above.  Get them approved as special economic development zones and you'll have reason to build things into them that would otherwise raise NIMBY objections.  There may even be enough room for a dozen or so billionaire bachelor pads if they can stand the noise from all of the energy-generating infrastructure.  Once they're profitable, maybe the residents can install a country club on the side of the platform facing the ocean.  That will give them the illusion of turning their back on landbound commoners and seceding from reality, which is what they obviously want anyway.  I'd love to see these things operating near San Francisco, as the backers intend, but I'll help them keep the endgame in mind.  Hire me now before my rates go up again.

Full disclosure:  I think this whole idea is stupid. 

Deep Sea Rare Earth Extraction From Mud - Improbable, But Possible

China's monopoly on the production of most rare earth metals leaves the rest of the world wondering about alternatives.  Any news of big finds or revolutionary extraction methods are bound to bring early investor attention.  The latest such news is a Japanese academic study of rare earth metal extraction from the deep seabed. 

The technical feasibility of deep sea mining is not in question.  Offshore industry has been able to extend drills, scoops, and other processing equipment to the sea floor since the 1970s.  Even the former Glomar Explorer is still in use.  Technical capability to drill an ocean floor deposit is not an indication of whether such an effort is economically feasible.    One big difference between deep sea oil drilling and metal drilling is the ability of colocated natural gas deposits to force oil through a bore hole to the surface in a confined pipe.  Any offshore driller looking to turn those rare earth drill sites into profitable mines will have to consider the energy costs of sucking tons of silt from the ocean floor through at least 11,000 feet of water.  Scooping it up is certainly an alternative, but compare lifting a scoop through miles of water versus traversing a much smaller distance on land.  Miners can build conveyor systems to carry ore out of land-based mines; building a conveyor system to go vertical from the sea bed would be a huge undertaking with a host of unknowns (like stabilizing it against ocean currents).  Engineers may be up to the challenge right up until a driller's finance department figures out how much it will all cost.

Consider the environmental implications of the Japanese research project's findings.  If the silt is processed on a surface ship, where will the processor dispose of the slag?  Simply dumping it overboard is not a viable option, especially if it's been acid-leached (as the Japanese researchers claim to be the ideal technique).  Whichever country ends up granting drilling permits will undoubtedly want to enforce its environmental laws on the seabed.  The EPA will probably require slag to be brought down to the seabed with controlled action.  Operators should thus plan on doubling their estimates for an energy budget. 

Add it all up and filtering through deep sea silt looks like a lot more trouble and expense than prospecting for rare earths on land.  It's not impossible, but it needs to be profitable. 

Disastrous News for Inland Shippers On The Mighty Miss.

I'm glad I sold off Tidewater (TDW) once I saw its deteriorating fundamentals.  Now here's another reason to shy away from inland shippers and offshore servicers for a while.   Recent flooding has poured so much silt into the Mississippi River channel that business Brahmins around N'awlins are asking for $95mm worth of dredging.  That kind of money is more than double the Army Corps of Engineers' entire dredging budget, but don't think of this as a potential stimulus.  Emergency dredging has "broken window fallacy" effects.  That money will have to be diverted from something else that's just as urgent while Congress is trying to keep federal spending from triggering defaults (on federal contracts, not debt service payments). 

Things are thus worse than I thought on several fronts and I'm notorious for pessimism. It's bad news for barge operators, both captive oil company fleets and independent operators like Kirby (KEX).  Barge operators can do the math on how much less cargo they can carry if drafts are maxed at 43 feet.  Shippers of bulk grain and petrochemicals will have to calculate how much extra storage space they need dockside while they wait for underutilized barges to make return trips.  Excess inventory has a carrying cost.  Maybe this is good news for certain railroads whose trestles haven't been washed away by floods. 

Full disclosure:  No positions in either stock mentioned at this time.

Total Divestiture Of TDW

When I went long TDW over a year ao, I thought the stock was winner.  It seemed to have everything going for it, at least according to the Buffett-derived value investing criteria I use to select equities.  It had good ROE and cash flow, and management seemed to know how to add value.  All of that has changed as of this June.

TDW's earnings have fallen 79% in the most recent quarter.  Its EPS growth is now negative, along with its operating cash flow (with little hope of a turnaround).  This is very disappointing in an environment when petroleum prices are at a premium.  Long term debt has exploded from $275mm in 2010 to $700mm now.  That is a huge disappointment and a major burden to carry.  Imagine one of Tidewater's ships dragging several giant anchors through the Gulf of Mexico while underway.  That's the kind of drag on the company this new debt represents. 

Goodbye, TDW.  I've sold off my entire long holding in this stock (at a decent profit, I must admit) and unwound my covered call position.  I only wish I had sold off this stock when it was over $60.  I had considered initiating formal research coverage of TDW until I realized that its recent financial results leave too much to be desired.  I don't think I'll come back to this stock, as there are undoubtedly healthier plays in the energy and offshore services sector.

Full disclosure:  No more positions in TDW; all long equities and short calls unwound today prior to publishing this post. 

RIG And A Deep Dig, Plus New Oil Exploration

Here's a brief note on something that will catch more investors' eyes in the years ahead.  Transocean announced a new deepwater drilling success, possibly even a new world record.  This kind of expertise is going to be very much in demand as the low-hanging fruit of onshore and shallow-water drilling is maxed out.  The industry needs answers now as it prepares for drilling in the Arctic.  How deep will they have to go?  How thick is the ice?  Answer those questions, plus tons of others, and a lucrative career awaits geologists and engineers north of the Arctic Circle. 

Plateau Oil won't be as bad as Peak Oil with drillers like RIG around, assuming they survive BP's massive lawsuit over the Deepwater Horizon fiasco.  New guidelines on the use of blowout preventers will help explorers, provided they get wide dissemination.  Any drillers looking to expand south of the border?  Mexico needs oil services if it wishes to transform its slide down the far slope of Peak Oil into a nice slow drift toward Plateau Oil. 

Nota bene:  No positions in RIG or BP.

Moribund Resource Leases Primed For Activity

Here's a surprising release from Uncle Sam's primary grantor of leases for energy development, the Department of the Interior.  Many leases granted for energy production are currently unused:

A report requested by President Obama and released by the Department of the Interior shows that more than two-thirds of offshore leases in the Gulf of Mexico and more than half of onshore leases on federal lands remain idle, neither producing nor under active exploration and development by companies who hold those leases.

This lack of activity represents a prime opportunity for investors in an age when hydrocarbon resources are increasingly difficult to find.  Many of these leases are probably inactive due to the higher costs of drilling and extracting in certain regions.  Environmental regulations for drilling on federal land make drilling difficult and costly even in well-explored areas.  The next logical step for the federal government to take is a review of regulatory obstacles that are keeping leases out of active production.  There's plenty of disagreement over whether these leases are as inactive as the government claims, but there's also plenty of room for more domestic oil and gas production. 

Full disclosure:  Long TDW with covered calls.  That's an offshore oil services company. 

Energy Diversity In The Works (Hopefully)

U.S. energy policy is overly reliant on hydrocarbons, particularly oil.  That's an easy observation to make but changing course is hard.  It takes unsettling news of Middle Eastern violence to smack us all out of our collective stupor.  Libyan oil disruption is now confirmed and other oil producers are due for their own versions of nasty shakeups.  More unrest means more oil price spikes. 

The U.S. has plenty of oil in deepwater and unconventional sources but last year's Macondo blowout in the Gulf of Mexico taught us the difficulties of extracting it.  Restrictive regulations for offshore drilling can be a cloud with a silver lining.  New regulations will increase production costs and discourage new exploration, but they also make renewable alternatives look more attractive. 

All is not lost for the U.S. We can make our existing energy distribution network more flexible with efficiency programs and smart grids.  California shows us the way to energy efficiency, as usual.  China is looking to the West for help with smart grid projects.  American companies should at least try to penetrate the Great Wall of China if they have energy goodies to sell.  Emerging economies are hungry for new infrastructure.  Let's hope America wakes up - but hope is not a method. 

Full disclosure:  Long TDW with covered calls. 

Good News For Select Offshore Drillers

A baker's dozen of offshore drilling companies just got a belated Christmas present.  Uncle Sam has decided they can resume their drilling without resubmitting their plans. The only proviso is compliance with rules adopted in the aftermath of the BP Macondo blowout.  The federal government has the right intentions, and is allowing for common sense given these operators' performance.  It would be a bit more reassuring if the government could make the new rules clear. 

The eventual resumption of drilling, even if it's piecemeal, should likely be good news for offshore servicers like Tidewater (TDW) and its competitors.  It's worth noting that the select companies do not include the ones directly implicated in the blowout:  BP, Halliburton, and Transocean.  The findings of the presidential commission investigating that blowout are particularly troubling for BP and will strengthen the government's lawsuit seeking $21B in damages under the Clean Water Act.

Full disclosure:  Long TDW with covered calls and cash-covered short puts.  No positions in any other companies mentioned. 

Drilling Through The Seabed Is Fun And Profitable

The Administration has thankfully lifted its self-imposed moratorium on deepwater drilling in the Gulf of Mexico, opening the way for a return to normal for thousands of waterborne roustabouts.  Handwringing over the possibility of more catastrophic spills is overblown.  Memories in the offshore drilling industry are long, and the prospect of lives, time, and money lost to a disaster will make every firm involved more risk-conscious.  Tighter government regulation is inevitable and warranted.  Rig owners should welcome that oversight because meeting higher standards will make liability tougher to prove in future litigation. 

This is definitely bullish for the oil supermajors and their drillers and servicers.  Transocean, McDermott International, and Oceaneering International spring to mind as worth watching.  It probably won't hurt Tidewater either.  Big finds on land are growing scarcer, so prospects in the deep blue sea look more attractive.  The Arctic Circle and Antarctica beckon.  One can only guess at the riches under the ice caps.  More capacity means less upward pressure on diesel prices, until it all runs out and we have to make biodeisel from switchgrass.

Full disclosure:  Long TDW with covered calls and cash-covered short puts.  No positions in RIG, MDR, or OII. 

End Of Spill, Ready to Drill

BP has stopped the Deepwater Horizon blowout.  Hooray.  Any talk of stopping deepwater drilling in the Gulf of Mexico is now mere political theater with the mitigation of this six-sigma event. 

Consider that much of the feared damage from the spill never materialized.  Much of the spilled oil degraded due to natural environmental action with no help needed from BP and its relief teams.  The U.S. government now has a firm methodology for calculating the potential damage from oil spills.  NOAA's Oil Budget Calculator will help determine the scale of the response needed for future accidents.

The government isn't the only party that's acquired valuable experience from this event.  The supermajors are committing to build a billion-dollar rapid-response system.  The world's leading sub-sea engineers have now nailed down firm procedures for capping gushers on the deep seabed, adding to the industry's body of knowledge.  Future spills can now be solved without wasting so much time with trial-and-error engineering. 

The U.S. simply can't get by without oil from the Gulf.  The offshore oil industry will be indispensable to the world economy for the next several decades. 

Full disclosure:  Long TDW with covered calls.  No position in BP. 

The Haiku of Finance for 05/25/10

Let's drill, baby, drill
Oil service fleets will clean up
Lots of future spills

Tidewater's Offshore Future

Here's one of the reasons I was willing to go long Tidewater, in addition to its admirable long term fundamentals.  Offshore oil drilling has a bright future in the U.S.:

Drilling for oil and natural gas off the Virginia coast has been touted as a potential economic boon for the state and Hampton Roads that would create thousands of jobs and generate billions of dollars in investment in the region.
(snip)

In March, President Barack Obama opened the door for Virginia to become the first Atlantic state where oil could be drilled off the coast. Plans for a lease sale in 2012 appeared to be moving forward until an oil rig exploded, killing 11 workers and spewing oil into the Gulf of Mexico.

Look past the noise over the BP Deepwater Horizon disaster and see the future.  A transitional era to renewable energy sources will last decades.  American society can't function without a steady supply of petroleum.  The low-hanging fruit has been picked, so future oil supplies will be more difficult to extract.  Deep ocean rigs drilling for oil in the Gulf of Mexico and elsewhere will need service fleets, and Tidewater has that capability in abundance. 

Full disclosure:  Long TDW with covered calls; no position in BP.