Offshore Energy Exploration

Offshore Energy Exploration: America's Sunken Treasure
by Dan Denning
The Rude Awakening
Wall Street, New York
Friday, April 7, 2006

Dan Denning discusses Offshore Energy Exploration and a couple of oil service companies that may be worth looking at.

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[Joel's Note: Rude readers have had plenty to say about ex-
Federal Reserve Chairman, Alan Greenspan, and the effects
his legacy will have on us. Rude friend, Andy, calls him
the "old rascal" that may have done us a huge favor.
Another faithful reader carefully explained to us
Greenspan's befuddlement about the cultural value of gold
and the rise in oil prices. The million-dollar speaker
rarely utters a word these days that does not provoke some
thought or opinion among his listeners, critics, and
sympathizers.

That is why we here at Rude H.Q. would like to hear what
you have to say about Mr. Greenspan. We will be featuring
some responses in upcoming Monday Mailbags where we hope to
generate more discussion, and possibly find some answers,
about the man and the economy he left us all with.

Please send your thoughts to your Rude Awakening editor
here at aussiejoel@the-rude-awakening.com and keep an eye
out for the Monday Mailbags over the next few weeks.

And now, Mr. Denning has discovered quite the treasure
chest for oil thirsty America...

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America's Sunken Treasure
By Dan Denning

Oil-drilling companies are keeping very busy these days,
but they are about to get a lot busier. There is a vast
expanse of offshore U.S. territory that is off-limits to
U.S. energy companies. But this new frontier might be
hosting oil exploration very soon.

A recent Washington Post article relates: "The U.S.
Minerals Management Service has released a draft plan
calling for vast new areas of the Outer Continental Shelf
(OCS) be considered for oil and natural gas drilling. The
plan calls for drilling in a portion of the eastern Gulf of
Mexico and some areas off of Virginia and Alaska. About 2
million acres in the Gulf could be opened without any
special congressional or presidential approval. The other
areas would require such."

Offshore Energy Exploration: GOMR

What is the Gulf of Mexico Region U.S. Minerals Management
Service and what does it have to do with offshore energy
exploration? A quick explanation from its Web site: "The
Gulf of Mexico OCS Region (GOMR) is one of three regional
offices of the Minerals Management Service, an agency that
manages more than a billion offshore acres and collects
about $10 billion in mineral revenues annually. From the
days of its predecessor agencies and the creation of MMS in
1982, the program has brought in, through 2000, more than
10.9 billion barrels of domestic oil and 133 trillion cubic
feet of gas up from under the ocean floor; 97% which comes
from the Gulf of Mexico. OCS leases currently supply a
quarter of the U.S. production of natural gas and oil..."

The MMS has just submitted a five-year plan to Congress
that would greatly expand drilling in the Gulf. But most
members of Congress don't think the MMS proposal goes far
enough. Right now, there are two bills pending in Congress
that would allow additional drilling. Either version would
provide a substantial increase in offshore exploration
acreage. In other words, increased oil exploration in the
eastern Gulf seems to be a question of when, not if. There
is simply too much oil to ignore. The Minerals Management
Service estimates that there are 85.9 billion bbl of oil
and 419.9 tcf of gas as undiscovered resources that are
technically recoverable from all federal OCS areas.

The world uses about 30 billion barrels of oil per year.
The United States accounts for about a third of that
consumption. So with some rough back-of-the-envelope math,
you can see that with some generous assumptions, there may
be enough oil offshore to meet America's daily demand for
energy for...about eight or nine years.

Offshore Energy Exploration: Gradual Shift Gets Us 30 Years
 
Now, it's unlikely America would switch whole-hog from
importing light sweet crude oil from Nigeria or the Persian
Gulf, unless, that is, that oil stopped flowing for
geopolitical reasons. But if America shifted gradually from
foreign to domestic sources of fossil fuels, then,
according to the U.S. Commerce Department, the oil and gas
on the OCS could meet domestic industrial and commercial
needs for about 30 years. You've got to drill for it first,
though. That means the next few years could see a bonanza
in leasing, exploration, and production off American
shores.

Perhaps this is why New Mexico Sen. Pete Domenici (R), the
chairman of the Senate's Energy and Natural Resources
Committee, wants to expand offshore drilling from the 2
million acres in the MMS plan to 4 million acres total. The
Oil & Gas Journal quoted Domenici as saying if his proposed
bill passes, "It will be the single most significant thing
we can do to bring a substantial amount of natural gas to
market... Because it is so certain and so apt to occur,
because this production can be brought on within two years,
it will send a message to the marketplace that we are
serious about helping the American people."
 
Less than 26% of available Gulf Coast Drilling acreage has
been leased. One way or another, therefore, the Gulf will
be drilled. And oil service companies will make a mint.
That's one reason why the future seems very bright for oil-
service companies like Houston-based Grant Prideco (GRP).

The company makes drill bits and tubular technology for oil
drilling and service companies. And not surprisingly, its
earnings are booming. For all of last year, GRP earned $189
million, or $1.45 per share, on sales of $1.35 billion.
That's revenue growth of 42%, with triple-digit profit
growth year over year and a backlog of over $800 million in
orders, as worldwide rig counts grow and the Gulf rebuilds
from last year's hurricane season.

You can chalk up much of the company's recent success to
its August 2004 acquisition of Diamond Products Intl., a
designer and manufacturer of specialized polycrystalline
diamond compact (PDC) drill bits and coring equipment. The
acquisition boosted GRP's market share in the drill bit
market to over 50%. GRP's bit business is similar to
Kennametal's (KMT), although KMT focuses on mining and not
oil. What they both have in common is the prospect for
future earnings growth, and therefore stock price growth.

Offshore Energy Exploration: Buying Itself

The second reason I like the stock is that the company is
also buying it. In mid-February the board approved a stock
buyback of up to $150 million worth of shares. The company
has a mid-sized market cap of $5.6 billion and with the
recent sell-off in the stock, became a buyer of its own
shares.

Grant Prideco operates a relatively simple business that
you can easily understand: Earnings rise when volumes
increase, along with prices for the goods and services it
sells. Wall Street analysts expect this year's earnings to
grow about 50%. That puts the stock on a price-to-earnings
ratio of roughly 19 times 2006 earnings. Looking out to
2007, GRP sells for only 13 times the earnings estimated by
Wall Street's finest.

Admittedly, no one can predict what a market will be like
in two years, much less how much a company will be growing
its earnings. But Grant Prideco seems to be in the right
place at the right time. There is political pressure for
more drilling in GRP's backyard. It has a strong market
position. Sales volumes are rising. And the demand for oil
— the key driver of exploration and expansion of rig count
— is not likely to suddenly fall in the next two years.

Oil prices could collapse, of course, which would reduce
the incentive to increase exploration activity. But I would
consider that a risk worth taking.

[Joel's Note: It's no secret that the energy business is
heating up. You have probably felt the pinch at the pump,
when your electricity bills arrive and with the increased
cost of heating this past winter. And as Dan correctly
points out, a bet against oil prices falling is a bet worth
taking. So why not learn how you can profit from the next
big energy shock, rather than suffer when it arrives? I
would suggest starting with this report:
 
The Next Big Energy Shock
http://www.isecureonline.com/Reports/OST/EOSTG367/

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