Oil and Gas Drillers are HOT!

Steve McDonald
by Steve McDonald, Bond Strategist


In focus this week; oil and gas drillers are hot, extra yield with less risk and tax sitfa.

Barrons’ reported that since the BP (NYSE: BP) oil spill in the Gulf, deep water drilling worldwide has exceeded pre-disaster levels. And, the rig count worldwide is expected to grow by 30% in the next five years.

Dahlman Rose is forecasting, an 11% increase in North American energy exploration, rig utilization is expected to increase to 88% from the current 77% in 2013, and exploration spending is expected to get a boost from the strength in natural gas prices.

All of these add up to a very big opportunity in gas and oil drillers.

Barrons’ recently focused on a company called Oceaneering International (NYSE: OII). They described it as having carved out a dominant position in a niche business in drilling and whose earning’s steam is more resilient than Schlumberger (NYSE: SLB).

OII is the world’s largest provider of deep water ROV’s, remotely operated vehicles, which are essential to deep water well development.

Brian Lazorishak of Chase’s Mid Cap Growth Fund said, even though OII’s earnings can get moved around by oil prices their underlying ROV business is very solid.

Few companies even focus on ROV’s. Ten of 11 recent ROV contracts for new rigs recently went to OII, and at $10,000 per day per ROV – this is a rich business.

The real attractiveness of OII to big rig operators, who can see costs in the $1 million a day range, is that OII boasts the lowest downtime in the whole ROV business. That adds up to a lot of dollars saved.

As the easier to access energy resources dry up, deep water drilling will become the only alternative and that’s makes OII an essential service.

Higher Yield with a Lot Less Risk

A recent (Wall Street) Journal article listed a new fund that is buying tendered high-yield corporate bonds between the time they are tendered and they are actually purchased.

A tender is when a company offers to buy back a bond before maturity.

It is always a nice surprise.

They usually pay more than the market price for the bond, so it’s usually good for the bond holder, and it takes about 90 days to close the deal.

Why are these lower risk than other corporates? Because the company has already set aside the cash to buy them back or have secured new, lower cost financing to refinance the bonds.

Both of these are a great deal for the company and the bond holder and a very good short term money maker!

The money making part of this is; since there is usually about 90 days between when a company offers to buy back bonds and when they actually close the deal, the bond holders continue to collect their interest.

So, we have a bond that is in affect backed by new money, by a company that is in good enough shape to either secure new financing – always a good sign – or even better, have the cash to buy back the debt. In either case they are reducing their debt or the cost of their debt.

All very positive signs! That’s why I call it much higher yield with lower risk.

The only short coming I can see is that since the offer for the bonds always drives up the price of the bond, you receive a slightly lower yield than before the offer. But, you are also getting rates well above other income investments with a lot more security than other corporates offer.

Maybe the best part is you only have to hold the bonds for 90 days or less. If you have been following my articles about bonds and the bond market you know that is a huge advantage. It does mean more transactions but it keeps your money ultra-safe from inflation and a selloff in the bond market.

Ninety day bonds backed by cash or new financing.

The Slap-in-the-Face Award

Well, you knew the fiscal cliff thing would come down to the last minute. So here’s an obvious smack for our fearless leaders in DC who continue to argue about raising taxes on a small part of our country, when both sides know what we really need is a flat tax, or a revamping of the tax code.

It’s fair for everyone. It closes all the loop holes that enrage the folks who don’t have the big deductions and get stuck by the ridiculous rates, it makes it a level playing field for everyone, everyone, and in all studies I have seen that weren’t politically motivated, it would increase revenues well over what is needed to close the budget gap.

Of course, that would mean admitting that the current insane tax code, which was written by our fearless leaders, is exactly that, insane. So don’t expect any effort in that direction.

What’s the biggest problem with trying to close the budget gap by taxing a tiny part of the population?

If they gut one part with insane rates and get away with it, they will come after the rest of us, too. That’s how it has always worked in the marble puzzle palace.

So, get ready, the tax man cometh and right soon. This time via the so called rich.

That’s it…

Good Investing,


comments powered by Disqus