This thriving industry is generating Nvidia-like returns, and it’s not connected to AI

By Better Today On Sep 18, 2023

# Oil Demand and Offshore Plays

According to renowned investment author John Mauldin, even if one agrees that oil is near its peak, the Environmental, Social, and Governance (ESG) movement is limiting both the capital and locations that can be drilled.

“If you reduce a supply of something that has an increasing demand, the price is going to rise,” warns Mauldin, who is affiliated with an independent oil and gas operator.

## Offshore Oil Surge

This concept has been particularly observable in offshore oil plays. Over the last 52 weeks, the VanEck Oil Services ETF has risen a staggering 51%, compared to the S&P 500’s gain of 15%.

Weatherford International, an oil services company, has seen a 202% surge in its stock during the same period. Similarly, Transocean and Tidewater are nearing a threefold increase in their value.

Despite these impressive figures, interest in the sector remains low. At a recent Barclays offshore oil conference, many chairs were left empty, highlighting the industry’s overlooked potential.

## Focus on Owners and Operators

Rupert Mitchell, author of the Blind Squirrel Macro blog, is concentrating on owners and operators of oil rigs or drill ships, their support vessels, and specialist service providers. This sector boasts a combined market cap of $30 billion.

Companies like Valaris, Noble, and Weatherford have emerged from bankruptcy with limited to no debt. Meanwhile, Transocean is laden with debt but possesses the most high-end assets, putting it in a prime position to leverage rising day rates.

## High Utilization Rates and Climbing Day Rates

Mitchell’s argument is straightforward — with high utilization rates exceeding 90% and climbing day rates, offshore companies are trading at a discount of up to 80% to their replacement cost. This discourages the construction of new equipment as shipyards, previously burned by the sector, are now focusing on booming areas like liquified natural gas carriers.

“We are a way off that point. Oilfield equipment and services players with low average age fleets are going to increasingly become price-makers,” Mitchell writes.

## The Market Overview

U.S. stock futures were listless after the S&P 500 slipped 0.2% last week. Oil futures were above $91, and bitcoin futures were above $27,000.

## The Buzz

Major events this week include the upcoming Fed decision. Monday’s economics calendar includes home-builder sentiment. Over the weekend, Stellantis offered a 21% wage rise over the course of a new contract, but the United Auto Workers swiftly rejected the proposal.

## Portfolio Volatility

According to UBS strategists, it takes 24 stocks to reduce portfolio volatility to within 10% of the market volatility over the past five years. Tests conducted since 2009 found the median number that brought portfolio volatility within 10% of the market’s to be 28. However, the stocks tested were picked at random, without considering diversification.

## Random Reads

In other news, pirated movies are being watched on TikTok, one 90-second clip at a time. Elsewhere, a popular podcast host was quizzed on the viral trend of men’s obsession with the Roman Empire. Lastly, the New England Patriots’ lateral to an offensive lineman on a desperation fourth-down play was controversially ruled short of the sticks, causing uproar among fans.

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Original Story at www.marketwatch.com – 2023-09-18 10:40:00