The publication states that the underlying factor is that U.S. Oil Services companies have margins of 30-50%, while European Oil Services companies have margins of 6%. This is surprising. The publication attributes this sizeable difference to U.S. Oil Services companies being focused "below the mudline (land or seabed)," while European Oil Services companies being focused "above the mudline." If so, there must be a principle operating here of something like "hope (or oil) springs eternal," meaning that the oil companies are willing to pay more for what is unseen and hoped, than for what is seen and known.
Tuesday, February 19, 2008
Hope (for Oil) Springs Eternal
Oil Services companies are driven by the capital expenditure portion of the oil business, meaning that the revenues of these companies are received from the capital expenditures made by international and nationally-owned oil companies to discover and develop oil. Because I have an aversion to companies with high capital expenditures, lovingly termed "capital pigs," I have never been willing to invest in the Oil Services business. Yet, the cyclical financial strength (as measured by margin of profit and return on capital) of some of these companies has repeatedly peaked my interest. A graph from a Deutsche Bank publication shows that despite heavy participation in Oil Services by both U.S. and European companies, the U.S. market capitalization is four times as great: 
The publication states that the underlying factor is that U.S. Oil Services companies have margins of 30-50%, while European Oil Services companies have margins of 6%. This is surprising. The publication attributes this sizeable difference to U.S. Oil Services companies being focused "below the mudline (land or seabed)," while European Oil Services companies being focused "above the mudline." If so, there must be a principle operating here of something like "hope (or oil) springs eternal," meaning that the oil companies are willing to pay more for what is unseen and hoped, than for what is seen and known.
The publication states that the underlying factor is that U.S. Oil Services companies have margins of 30-50%, while European Oil Services companies have margins of 6%. This is surprising. The publication attributes this sizeable difference to U.S. Oil Services companies being focused "below the mudline (land or seabed)," while European Oil Services companies being focused "above the mudline." If so, there must be a principle operating here of something like "hope (or oil) springs eternal," meaning that the oil companies are willing to pay more for what is unseen and hoped, than for what is seen and known.
Friday, February 15, 2008
Why ConocoPhillips (COP)?
Ever since early 2006, when I learned about Berkshire Hathaway's (BRK) decision to purchase shares of ConocoPhillips (COP), I have wondered what caused BRK to choose COP over the other Big Oil companies. My analysis of an indepth study written by Deutsche Bank has yielded some results. These two graphs depict COP's conservative attitude towards geographic selection. While other companies drill with little regard for the political climate, COP appears to choose carefully based on honoring the "finders, keepers" principle.
Thursday, February 14, 2008
History Of Oil
I have been studying a text about the oil & gas business written by the research team at Deutsche Bank. Since I grew up on a farm and experienced the volatility of commodity pricing, I have never been interested in oil & gas investing. However, watching the oil producing countries effectively "tax the world" has at least gotten my attention.
Since the beginning in 1859 when Colonel Edwin Drake struck oil, one clear pattern has emerged. Left to its own, capitalist enterprises will compete self-destructively to deliver oil at increasingly low prices. As a result, artificial constraints are necessary. The role of Standard Oil, the Texas Railroad Commission and OPEC has been the same - to impose these constraints.
I had formerly assumed that these "price-fixing" entities were not in the market's best interest. Actually, that is not true. Without their discipline, oil pricing would cause inappropriate pricing and utilization of a limited resource. OPEC is Big Oil's best friend. Current profits confirm this.
Also, there appears reflexivity between inflation and oil profits. With inflation, "stuff" is worth more. Gold reflects this. Yet oil not only reflects it, but is in a feedback loop pushing inflation up. Further, the best periods of investment performance for oil stocks have also been the best periods for small cap stocks. While I do not pretend to understand the connection here, it's worth thinking about.
Since the beginning in 1859 when Colonel Edwin Drake struck oil, one clear pattern has emerged. Left to its own, capitalist enterprises will compete self-destructively to deliver oil at increasingly low prices. As a result, artificial constraints are necessary. The role of Standard Oil, the Texas Railroad Commission and OPEC has been the same - to impose these constraints.
I had formerly assumed that these "price-fixing" entities were not in the market's best interest. Actually, that is not true. Without their discipline, oil pricing would cause inappropriate pricing and utilization of a limited resource. OPEC is Big Oil's best friend. Current profits confirm this.
Also, there appears reflexivity between inflation and oil profits. With inflation, "stuff" is worth more. Gold reflects this. Yet oil not only reflects it, but is in a feedback loop pushing inflation up. Further, the best periods of investment performance for oil stocks have also been the best periods for small cap stocks. While I do not pretend to understand the connection here, it's worth thinking about.
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