Offshore is the last great frontier in the oil business, the only undiscovered country out there, unless you think there’s oil on the moon. The trouble with going offshore is that it’s incredibly expensive and ridiculously hard to do. There are a handful of firms in the world with the engineering know-how to find and produce oil from the depths of the sea. You reckon business will be good for them in the coming years?
While we’re on the subject of oil services and production, it’s a good time mention a stock that’s rarely discussed in polite company anymore, Halliburton (NYSE:HAL). It’s a stock everyone loves to hate, or, if you are a practical investor, a stock you might hate to love.
Halliburton is hated because it’s Dick Cheney’s old company. It’s also perceived as being a war-time profiteer, which may or may not be true. Advocates of so-called “ethical investing” are morally outraged that anyone would buy, much less profit, from a company like Halliburton.
Whatever else it is, Halliburton is indisputably one of the top oil service companies in the world. Yesterday, HAL reported third-quarter profit of US$727 million on US$3.93 billion in sales. Hate it all you want. But don’t let your hate cloud your investment judgment: oil services is a great market to be in at this particular phase of human history. Why?
“Only oil that has been found before can be produced.” Elegant. Simple. Indisputable. Thus begins the summary of a paper on the future of oil from the German Energy Watch Group.
It continues, “Therefore, the peak of discoveries which took place a long time ago in the 1960s, will some day have to be followed by a peak of production. After peak oil, the global availability of oil will decline year after year. There are strong indications that world oil production is near peak.”
Here is the argument in chart form:
With all this ominous news about higher oil prices, Warren Buffett has sold his position in China’s largest oil firm PetroChina (NYSE:PTR). “We made about US$3.5 billion on (an approximately) US$500 million investment,” Buffett told Dow Jones. “I still sold too soon as it turned out.”
Should we be buying when Buffett is selling? Buffett says the sell on PetroChina was not a result on pressure from shareholders to divest from a Chinese company linked to the refugee crisis in Darfur. It looks like Buffett was just taking a healthy profit and, perhaps, anticipating that a nice little bubble has developed in Chinese shares.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Tony on 23 October 2007:
Finally, a realistic forecast of peak oil by the Energy Watch Group!
Here is another forecast of oil, from The Oil Drum, that may be of interest
http://www.theoildrum.com/node/3064
It shows a peak oil plateau starting in 2006 and ending in the middle of 2009.
Comment by Coffee Addict on 23 October 2007:
Corrupt business is generally bad business. It can bite you at any time in unexpected ways.
A company is no more than a structure. It is neither good nor bad but it can bear liabilities associated with the past wrongs of its officers (eg. Annual reparations made by Volkswagen to Holocaust victims).
Who knows what liabilities HAL holds in its closet. The 2008 election may just be the event to flush them out. In any case most grievances should be properly directed to Cheney's arms length mates and the Oval Office rather than to HAL the Company. If these "mates" can are booted out then the company may have a future.
Can't disagree that energy related companies such as HAL are great long term investment. A key question is whether HAL's baggage and the prospects of an Iraq withdrawal (at some future time) are adequately reflected in a share price discount?