Monday, January 02, 2006

Matt Simmons: Sunrise in Oil Service?

A nice interview of Matthew Simmons in this weeks Barron's. Consider buying a copy, it's worth reading in it's entirety.

Barron's: Twilight for Oil? [$]


Q: Can the Saudis keep their current production where it is for quite a while?

A: That is certainly a likelihood. But there is a real but unquantifiable risk that it starts into the same type of decline we've seen in the North Sea.

Q: This is Barron's, so how do people profit from this?

A: If oil prices don't collapse, energy will be the best place to invest in 2006.

Q: Even though the stocks have had such a run-up?

A: Yes. Maybe they will be only up 1% and everything else will be down 10%, but I doubt that. The current prices we have for energy stocks are finally high enough to start some really significant spending on badly needed projects that have been ignored for a long, long time. The major oil companies can't spend money fast enough. The average E&P budget this coming year is up 35% to 50%. The problem is there are no more drilling rigs. So the backlog in the petroleum-equipment sector is starting to build.

Q: What kinds of companies will benefit?

A: Engineering. Valve companies. Flange companies. Pipe companies. Construction companies. The oil-service industry. Recently our analysts were updating our year-end earnings models. There were about three instances in a row in which earnings were expected to go from $2 in 2005 to $8 in 2007.

Q: Why does ExxonMobil have a different view of where the oil price is headed?

A: I don't have the vaguest idea why they could ever think we are going back to $25 oil other than their business model desperately needs that to happen to have their long-term strategy work. High oil prices are very bad news for big oil. The higher the price, the more proven reserves they've already booked they lose in these foreign concessions, because once their projects hit their payout targets, then the host government's share rises. I think the major oil companies are lost in the wilderness right now.