Some market thoughts from one of the money managers we interviewed this week. Gerald Jordan is a theme investor who looks for 1-2 year secular themes and tries to invest accordingly. He likes oil service stocks as you will see:
Mr. Jordan: Exactly. Our largest single theme in all of our funds is energy, specifically oil service and drilling. The oil service and drilling companies have been terrific stocks over the last six months. We think they will continue to work well here. We believe that overall global energy prices are going to remain buoyant because of many of things that most people know about, like overall demand, both domestically and internationally, particularly the international demand growth in Russia, China, India and South America.
We think those trends will continue and that overall demand growth of 1.5% per year globally will continue. At the same time, we’re depleting reservoirs that have been around for years. It’s getting harder and harder to find oil to replace the oil that we are depleting. It’s going to require far more spending to look for oil and a far greater number of rigs working at any one time. It’s a treadmill where people are going to have to run faster and faster just to stay in place. Now, whether that helps the exploration/production companies at this point remains to be seen because they are not going to see any real volume growth. Their earnings gains are going to be predominantly based on rising prices for the commodities. The reason we have biased ourselves toward oil service and drilling is because they can see prices improve and can grow units. In addition, the stocks are incredibly cheap right now. So there is a bias for a number of different groups of money managers to own these stocks.
We think the final end game is for private equity to get involved. Our largest holdings are in the offshore drilling area, and their contracts tend to be three to five years in length, making an LBO a less risky bet for private equity players. One of our largest holdings is a company called are Transocean (RIG). All of their revenues for this year are booked, 85% of their revenues for 2008 are booked, 60% are booked for 2009 and probably 35% for 2010. There are very few businesses that can say that they’ve got ironclad contracts. Recently, Devon Energy (DVN) announced that they were going to delay an exploration project in the Gulf of Mexico because of the lack of availability of rigs in the 2009-2010 time frame. That has put a bid in the stocks, but it reiterates the idea that there is going to be more and more demand for rigs in the future. Additionally, we think national oil companies are going to start to do more and more drilling, even if it means that their costs for drilling rise, because it will be in the best interest of those nations to continue to grow production, or at least keep production flat. A lot of these places are starting to see production flatter right now.
His interview is in this week’s TWST and this is the most recent energy service issue from TWST.
His other two big themes are in a part of financial services and healthcare.
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