For Subscribers

Get the complete article now!

TWST: Where would merger and acquisition activity fit into that overview?

Mr. Escott: It doesn’t necessarily. Our optimism is not that these companies will be taken over or acquired. Our optimism is that the basic business will have real growth of increasing demand and better pricing and better profitability from their basic businesses as they exist today, without regard to having to make acquisitions to fuel this growth.

TWST: How do you go about the ratings and assessments on the industry? Do you start at the top, or do you start bottom up and build the recommendation for each company?

Mr. Escott: We look at it more in terms of subsectors of the market, early cycle, mid-cycle, or late cycle; we look at which segments of the market are doing relatively better or relatively worse. Some sectors of the market may be less appreciated — there are perhaps surprises to come on the horizon — or we may feel that the valuation parameters are more attractive in other sectors. Currently, we are very optimistic about three important subsector themes. Following the money, the benefit will go next to suppliers of drilling equipment. National-Oilwell (NYSE:NOI) is the largest supplier of drilling equipment in the world and is currently enjoying a tremendous improvement in order rate. Another theme that relates is offshore marine services. Tidewater (NYSE:TDW) is the largest offshore boat company in the world. Each and every working offshore rig requires two supply boats to service it. So obviously, with a full rate of drilling rig utilization, we have a very, very high rate and high demand for supply boats to service each rig. Currently, the Tidewater Marine fleet is operating at over 90% of capacity. Day rates for these supply boats are rising rapidly, just as they are for drilling rigs. The same economics applies — shortage of equipment, increase in pricing, increasing vessel utilization, increasing earnings. All of which are positives for Tidewater.

TWST: Looking at the dynamics between oil production and natural gas, particularly with the US, focus on electricity reduction. Does that impact the short-term equation, or is that really a long-term factor?

Mr. Escott: Both short and long term. Certainly at least half of the wells drilled and certainly way more than half of the rigs that are running today are drilling for natural gas in North America and not for oil. Some of these same factors for oil exist in natural gas, but the natural gas market this year has been much tighter than oil. A lot of that is weather-related and seasonal. So we’ve gone through the winter (it was the coldest winter we’ve had in many years), and we significantly cut into the supplies of natural gas. Natural gas prices have spiked to a 20-year high — over 10 per thousand cubic feet this past winter for a very brief period. But still, in March, natural gas prices are 5 per thousand cubic feet, which is basically higher than it’s been in 20 years. Natural gas prices are relatively firm because supplies are tight, and demand is relatively strong. Demand is being fueled by the need to use gas in these gas-fired steam generators to produce electricity. Over 90% of the electric-powered generation equipment that is currently on order to be delivered are gas-fired. In the United States we no longer are using coal or nuclear for our new electric power generation. The California electric crisis seen this year has spurred a tremendous boom in the building of new gas-fired steam generators for electricity, and that is likely to continue to push the demand for natural gas in North America to produce electricity.