Oil Disaster After Disaster, Is Oil Doomed Or Just Revving Up?
We hate damaging the environment as much as the next environmentalist and this is a fact for us. Big oil is hurting our environment in a big way, so tighter regulations, more boycotts and safer methods are on the way. But will oil really be taking a back seat to alternative methods; solar, wind or nuclear any time soon? We think not and as a matter of fact we think it is going to see another rally in the coming years bigger and stronger then before. Consider this from our Fool investors…
New regulations are likely to make life more difficult for oil companies and anyone that feeds from that trough. But investors, and the general public, need to be realistic. The world needs oil. Our economies have grown dependent upon the slick stuff over the past century or so. As much as I would love for electric cars and bioplastics to take over tomorrow, the world isn’t going to kick its addiction to oil anytime soon.
Unfortunately, most of the easy oil has already been found, and we’re having to resort more and more to what are described as unconventional sources. These include the tar sands in Canada and deepwater drilling off the exotic shores of Brazil, Israel, Nigeria, and China. As you might expect, these unconventional methods of producing oil are expensive.
As extracting oil becomes more expensive, companies like ExxonMobil (NYSE: XOM) and CNOOC (NYSE: CEO) would prefer to know what lies beneath before pouring billions of dollars down a hole. That is where CGG Veritas (NYSE: CGV), my “11 O’ Clock Stock,”
Fast Facts on CGV Veritas
Market capitalization $3.2 billion Industry Energy Revenue (TTM) $2.47 billion Free Cash Flow (TTM) $433 million
Source: Capital IQ, a division of Standard & Poor’s, and company filing. TTM = trailing 12 months.
CGG Veritas is one of the leading seismic mapping companies in the world (using sound waves to map underground features), second only to Schlumberger (NYSE: SLB) subsidiary Western GECO. In addition to doing the actual mapping, CGG Veritas’ subsidiary, Sercel, is one of the leaders in designing and manufacturing seismic equipment technology.
While CGG Veritas’ teams are equipped to map land and sea, its focus is on the more technically challenging marine seismic mapping where its fleet and technological expertise give it an advantage. You could say CGG Veritas rules the waves.
Unfortunately, those waves have gotten quite crowded recently. As tends to happen when you combine the volatility of commodity prices with heavy asset investment that requires long lead times, the marine seismic industry is characterized by booms and busts.
During the heady days of 2005, 2006, and 2007, mapping companies couldn’t keep up with demand, and capital spending ramped up, including orders for new ships. However, just as these new ships were ready for their maiden voyages, the global recession of 2008 hit. With the slowdown in world economies, freezing of credit markets, and plummeting oil prices, Big Oil truncated its exploration plans.
Now, CGG Veritas faces an environment of low demand and bloated fleets, which pushes up competition for every contract, driving down the prices charged for jobs. The good news in this situation: With more ships trying to map the seafloor, CGV subsidiary Sercel has seen plenty of demand for its products, and this division has provided some much-needed buoyancy to CGG Veritas’ numbers.
To address the overcapacity issue, CGG Veritas retired nine ships, shrinking and modernizing its fleet. Unfortunately, there isn’t much the company can do to increase demand for its services, and the moratorium on deepwater exploration in American waters (and related delays elsewhere in the world) resulting from the back-to-back disasters in the Gulf of Mexico definitely won’t help.
Because of this, CGG Veritas’ management isn’t expecting to see a recovery in contract prices until 2011. As you might imagine, that has hurt the stock of late.
Speaking of recovery, you wonder what are the experts saying as of late? We look to Jeff Rubin he recently predicted that the price of crude would hit $100 again by the fourth quarter of this year. Something that we believe has a very good chance. A quote to remember? “We are not running out of oil but we are already out of cheap oil”