By Guest Author: Robert Williams, PhD, P.E.
The thrust of this industry perspective is to identify system supplier companies active in oil/gas process plants and to highlight their future earnings and charts for potential investment by our readers. The companies listed below are all international conglomerates that also provide process control systems for all the other industries as well. Therefore, their potential earnings are more dependent on the global economy rather than the oil/gas industry in particular.
Refineries, petro-chemical plants and all oil/gas processing facilities are extremely hazardous, i.e. explosive, processes because of the petroleum products and the very high pressures and temperatures involved in these processes. To this extent the industry has established stringent standards as to the safety of instrumented systems in order to protect personnel, environment and the process plant. In order to provide normal process control a distributed process control system (DCS) is engineered to provide central control of each process unit within the plant, e.g. refinery. In order to provide overall emergency shutdown of each process unit and the complete plant a safety instrumented system (SIS) is engineered for each unit. The SIS is a physically separate system from the DCS and generally utilizes dual or triple modular redundancy techniques to provide the extra reliability and availability in the event of process upset condition arising. Another process protection layer is provided by utilizing relief valves to relieve any high pressures that may arise during an upset condition.
Read Entire Post “Industry Perspective: Process Control Systems Suppliers” Here
Quite a bit has been made of the dollar rally recently and its contribution to the demise of commodities over the last several weeks, so I wanted to put up a 10 year chart of the US Dollar Index to get an idea of just how far the US dollar may rally before pulling back, which could be the catalyst for a furious snap back rally in commodities.
As I’ve said to members a couple weeks ago, I think the major bull run in commodities is in great jeopardy and I’d be selling into a major rally, but in the shorter term there is going to be tremendous profit potential across gold, oil, coal, etc. We’re seeing some of that today which could be the beginning.
Look at the major downtrend of the dollar and the spike over the last month. This rally is nearly vertical and the largest in 3 years. If you believe that the dollar is going to be able to sustain this kind of move and blow through major resistance of a 6 year downtrend, then keep shorting commodities. If you believe the dollar will fail at this line of resistance, at least for a few weeks then place your bets!
I was doing some searching around for a site with good free commodities charts and thought I’d share a list of decent resources. Ok, make that resource. I’ve had a heck of a time finding free charts of commodities, so if anyone has suggestions please leave them in the comments section. It’s greatly appreciated.
It’s interesting to look at historical prices of orange juice futures, frozen pork bellies and lumber. .. some of the commodities you never hear about.
Of course it’s also interesting to take a look at the parabolic runs in corn, wheat and oil. One decent free resource is TradingCharts.com. It’s not the most user friendly site you’ll ever use but they do have all the commodities charts and if you display on a monthly basis you can pull up a 10 year chart.
Can you say bubble?
The corn bubble appears to be popping.. don’t expect to ever see $750 again
Very skinny heady and shoulders top on wheat? 1250 will never be seen again.
Oil at $110 in the near future is all but a given and I think if we can’t hold there, we could see $90 by next year. Even if oil drops to $75, if still retains its bullish uptrend.
I’m looking for some kind of snap back relief rally in many of these commodities, but the longer term picture (6 months to year) doesn’t look good if you’re a commodity bull.
Peak Oil, Peak Water.. We’re All Gonna Die
Let’s keep this in context.. gloom and doom sells. Period. I’m not disputing the fact that scarce commodities are becoming increasingly valuable but I don’t buy all the gloom and doom either. That being said, I just read a good article on Peak Water from Wired.
Here are the cliffs notes for those short on time:
* 1.1 billion people, about one-sixth of the world’s population, lack access to safe drinking water.
* Shortages are reaching crisis proportions in even the most highly developed regions, and they’re quickly becoming commonplace in our own backyard, from the bleached-white bathtub ring around the Southwest’s half-empty Lake Mead to the parched state of Georgia, where the governor prays for rain.
* … This is not to say the world is running out of water. The same amount exists on Earth today as millions of years ago — roughly 360 quintillion gallons. It evaporates, coalesces in clouds, falls as rain, seeps into the earth, and emerges in springs to feed rivers and lakes, an endless hydrologic cycle ordained by immutable laws of chemistry. But 97 percent of it is in the oceans, where it’s useless unless the salt can be removed — a process that consumes enormous quantities of energy.
* Freshwater is the ultimate renewable resource, but humanity is extracting and polluting it faster than it can be replenished.
* If moneyed special interests determine the going price of water, eventually they will edge out users who can’t afford to pay top dollar. Agriculture will be squeezed out, as will water rights for poorer communities. And the environment, it goes almost without saying, will twist in the wind
* "People need to get away from the idea that you just turn on the tap and all the water you want is there"
* Stripping seawater of its salt is a pricey way to obtain freshwater, cost-effective only for high-end uses like drinking, but not bathing or watering gardens.
* The country (Australia) was founded during the second-worst drought in its history, but the worst dry spell is unfolding right now. Rainfall, which has declined to 25 percent of the long-term average, is projected to plummet another 40 percent by 2050.
* The price of beer has been rising since a jump in barley prices, a development that many joke could lead to large-scale civil unrest. But it’s no joke: The global price of wheat hit its highest level in decades in December, partly due to Australia’s water shortage.
* Americans already use 20 percent less water per capita than they did a generation ago. Gains in industrial use are even more impressive: A ton of US steel manufactured today requires just 2 percent of the water it did in the 1940s. Still, we are using more than we have. Can we change enough, and soon enough?
Investing in companies that control, distribute and/or purify water are probably safe bets over the next several years. Two ETF’s provide a diversified way to do that – the PowerShares Water Portfolio (PBW) and the Claymore S&P Global Water Index ETF (CGW)
2030 Projections for the Oil & Gas Industry
ABOUT: The following Oil & Gas Industry report is provided by guest author Robert Williams, PhD, P.E., and industry executive with over 40 years experience working for major oil corporations as well as smaller companies all across the globe. Robert has extensive petroleum, water and electrical industries experience regarding Supervisory Control and Data Acquisition (SCADA) systems, Management Information Systems (MIS/IT), Distributed Control Systems fire & gas/emergency shutdown systems, instrumentation, metering, communications, security/CCTV and electrical engineering on such major projects as Shell Bonga FPSO, Saudi Strategic Storage Project, Libyan Water Pipeline, Trans Alaska crude oil pipeline, Alaska Natural Gas Transportation System, Occidental Piper B and Saltire offshore platforms and many other worldwide projects.
Oil & Gas Industry Perspective Part II (Offshore)
by Robert Williams, PhD, P.E.
See Part I – Oil & Gas Engineering
The major oil supplier areas of the world are Middle East (specifically Saudi Arabia), West/North Africa, Russia, Venezuela, Mexico, Indonesia and including the North American suppliers and consumers, USA and Canada. Major oil consumers are USA/Canada, Europe, Japan, China, India/S.E. Asia and Australia/New Zealand.
The crude oil process of converting to automobile gasoline involves finding the oil or gas by seismic surveys, drilling and extracting, producing and transporting crude oil. Crude oil may be refined at the supplier’s origin country and the petroleum products exported or the crude oil is transported for refining in the consumer country. Natural gas is pipelined to consumers otherwise it has to be transported as liquefied natural gas (LNG) tankers.
Oil and gas industry capital expenditures include exploration permits from national governments, seismic surveys, either buying or leasing drilling rigs, onshore/offshore processing facilities, crude oil/products pipelines and/or tankers including loading and offloading port facilities, crude oil/products storage terminals, fuel truck loading racks and gasoline stations.
These industry perspectives are designed to identify companies actively involved in all of the oil/gas industry aspects and specifically highlight those for potential investment on a long or mid-term basis. There are many companies who are industry leaders and there are others that have established a niche in these industries Their charts will be provided to identify possible long trades. No speculation will be made as to short or options trades in these companies. The first Industry Perspective highlighted oil/gas engineering companies whereas this Industry Perspective will focus on offshore crude oil exploration and production.
Finding and producing oil and natural gas deposits, converting these into petroleum products and transporting them to market makes the oil/gas industry the most international of all industries. Many offshore production and supplier companies are exchange listed in London, Oslo, Amsterdam or other exchanges, including Australia. These companies have not been identified in this Industry Perspective No. 2. Please contact author at firstname.lastname@example.org if you have international trading access and wish to know more about these companies.
1. Maintained high crude oil prices are initiating new and old exploration fields to be developed. For example, Chile has just announced exploration and production contracts for new onshore development fields.
2. Driven by increased demand in China and India, Asia is now the largest consumer of oil products.
3. The production of oil and gas reserves is increasingly moving to remote, challenging locations, such as Russia’s Sakhalin Island, offshore West Africa (Angola, Nigeria, etc.), and Canadian arctic and deep or ultra deep offshore locations including the Gulf of Mexico.
4. A major oil company has made a new oil discovery in the ultra-deep offshore West African coast in water depths of approximately 6000 feet. Ultra-deep is an industry term which especially applies to the Gulf of Mexico where oil exploration and new discoveries are at depths of up to10,000 feet.
5. Anadarko Petroleum (APC) has made an oil discovery at its West Tonga prospect in the deepwater Gulf of Mexico. The discovery well, located in approximately 4,700 feet of water, was drilled to a total depth of 25,680 feet. The well was drilled by Diamond Offshore’s (DO) semi-submersible, Ocean Valiant. (Source: Rigzone 12/05/2007)
6. Chevron and Massachusetts Institute of Technology announced an energy research program to develop remote, ultra-deepwater exploration and production technology. The $5 million Chevron Remote and Ultra-Deepwater Research Program will focus on developing the technologies required to access hydrocarbons in water depths up to 10,000 feet in a safe, cost effective and environmentally friendly manner. (Source: Rigzone Newsletter)
7. Mexico’s national oil company (Pemex) has only nine years of proven oil reserves at current production rates, and the company is hoping to find new deposits in deeper waters of the Gulf to compensate for declining output at its traditional areas. Pemex plans to begin producing oil at deep water projects in 2014.
8. China’s electricity consumption has exceeded planned expectations to the extent that is affects reliability, i.e. shortages and many parts of China have electricity rationing programs. World Bank projections are for a doubling of energy consumption from 2000 to 2020. China are building a semi-submersible capable of deep and ultra-deep drilling for their offshore fields which is part of their long range planning to alleviate their dependence on imported crude oil.
9. The Shell Bonga field, offshore Nigeria, required a complex and extensive subsea system to extract the crude oil from 3000 feet deep water. Production facilities comprise one of the world’s largest Floating Production, Storage and Offloading vessels (FPSO) and deepwater subsea infrastructure. Author was onboard the Bonga during topsides assembly, prior to sailing to Nigeria, and can wholeheartedly verify its size. An FPSO is effectively a 2 million barrel stationary tanker with an offshore production platform on its deck.
10. Bonga subsea well clusters were drilled and completed from a mobile drilling unit and connected to the centrally located FPSO by production flowlines, risers and control umbilicals. The project’s estimated recoverable resources add up to more than 600 million barrels of oil. Production began in November 2005 and the current production is 225,000 barrels of oil and 150 million standard cubic feet of gas per day. Crude oil is offloaded onto tankers and gas is pipelined to onshore facilities. Field development costs were approximately $3.5 billion and the initial exploration contract was agreed in 1993. Source: Royal Dutch Shell (RDS)
11. An umbilical is an assembly of hydraulic hoses which can also include electrical and/or fiber optic cables used to control subsea structures from a platform or a surface vessel. A Riser is a pipe or assembly of pipes used to transfer produced fluids from the seabed to the surface facilities or to transfer injection fluids, control fluids or lift gas from the surface facilities to the seabed.
12. Offshore fixed platforms have been the norm for continental shelf oil/gas drilling and production; tension leg platforms are used to 3,000 feet water depths and floating production facilities are used for deeper waters. A Tension Leg Platform is a floating production unit anchored to the seabed by taut vertical cables, which considerably restrict its heave motion, making it possible to have the wellheads on the platform.
13. A semi-submersible is a floating drilling vessel that is supported primarily on large pontoon-like structures submerged below the sea surface. The operating decks are elevated above the pontoons on large steel columns. This design minimizes loading from waves and wind. Semi-submersibles can operate in a wide range of water depths, including deep water. They are usually anchored with six to twelve anchors tethered by strong chains and wire cables, which are computer controlled to maintain the semi submersible at the programmed location.
14. In ultra deepwater, riser systems become a technical challenge and a major part of the field development costs. Large external pressures in these great depths cause flexible solutions to run into weight and cost problems.
Major Oil/Gas Companies
Exxon Mobil Corporation (XOM); BP (BP) Chevron Corp. (CVX); Conoco Phillips (COP); Occidental Petroleum Corporation (OXY); Marathon Oil Corporation (MRO); Anadarko Petroleum Corporation (APC) are some of the international oil and gas companies involved in the exploration and production of crude oil and natural gas; the manufacture of petroleum products, and the transportation and sale of crude oil, natural gas and petroleum products. APC is a oil and gas exploration and production company whose major areas of operations are located in the United States, the deepwater of the Gulf of Mexico and Algeria. Anadarko also has production in China, Venezuela and Qatar, a development project in Brazil and is executing exploration programs in several other countries.
Independent Oil/Gas Companies
Apache Corp. (APA); Devon Energy Corporation (DYN); Murphy Oil Corporation (MUR) are independent energy companies that explore for, develop and produce natural gas, crude oil and natural gas liquids. APA’s exploration and production interests are focused in the Gulf of Mexico, the Gulf Coast, East Texas, the Permian Basin, the Anadarko Basin and the Western Sedimentary Basin of Canada. It has interests in onshore Egypt, offshore Western Australia, offshore the United Kingdom in the North Sea (North Sea), and onshore Argentina. DYN owns oil and gas properties principally in the United States and Canada and, to a lesser degree, regions located outside North America, including Azerbaijan, Brazil and China. Murphy’s exploration and production include the United States, Canada, the United Kingdom, Ecuador, Malaysia and all other countries.
Oil/Gas Offshore Services Companies
Transocean Inc. (RIG) is an international provider of offshore contract drilling services for oil and gas wells. RIG owns or operates 89 mobile offshore and barge drilling units. Its fleet included 32 high-specification semi-submersibles and drill-ships, 20 other floaters, 25 jack-ups and four other rigs as of February 2, 2007. RIG’s primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells.
Diamond Offshore Drilling, Inc. (DO) provides contract drilling services to the energy industry worldwide and is also engaged in deepwater drilling with a fleet of 44 offshore drilling rigs. The Company’s fleet consists of 30 semi-submersibles, 13 jack-ups and one drill-ship. The Company offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semi-submersible and jack-up markets. The Company provides offshore drilling services to a customer base that includes independent oil and gas companies and government-owned oil companies.
Schlumberger Limited (SLB) is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. SLB subsidiary WesternGeco is an advanced surface seismic company. SLB’s products and services include the evaluation and development of oil reservoirs (controlled digging, pumping and testing services), well construction and production consulting, and sale of software programs. The Company also offers storage tank and seismic monitoring services.
Halliburton Company (HAL) provides a variety of services, products, maintenance, engineering and construction to energy, industrial, and governmental customers. Its six business segments are: Production Optimization, Fluid Systems, Drilling and Formation Evaluation, Digital and Consulting Solutions, Energy and Chemicals, and Government and Infrastructure. It refers to the combination of Production Optimization, Fluid Systems, Drilling and Formation Evaluation, and Digital and Consulting Solutions segments as its Energy Services Group (ESG).
Flowserve Corporation (FLS) is a manufacturer and aftermarket service provider of flow control systems. The Company develops and manufactures precision-engineered flow control equipment, such as pumps, valves and seals, for critical service applications. It produces industrial pumps, industrial valves, control valves, nuclear valves, valve actuators and precision mechanical seals, and provides a range of related flow management services worldwide, primarily for the process industries.
Some companies involved with deep sea oil/gas developments have significant earnings projections.
The oil/gas companies combined performance charts (see chart) indicates a general uptrend and are all indicating increasing earnings. Please note that recent markets declines do affect these companies’ stock pricing but may very well provide excellent entry points depending on your market timing criteria.
The world is continuously expanding both crude oil consumption and development of new crude oil sources. See the next Industry Perspective for oil/gas projections to 2030.
If you have questions or comments for Robert regarding this report or the oil industry, you may submit them here at the blog using the comments form or click "Contact" above to submit and I will forward those on.
Disclaimer: The author Rober Williams, currently has no positions in the companies above. I do have a long position in Transocean (RIG).
Have home builders bottomed? That’s the million dollar question and a question that has popped up frequently recently following a two week 20 – 30% surge in shares of home builders. I’ll tip toe half way out the limb and say yes and no. When I’m looking for a bottom in anything, whether it be an entire sector or individual stock I’m looking at several key criteria:
1. Is There a Rally On Bad News?
When a true bottom has been put in, more bad news doesn’t move the stock because it’s already been priced in. Traders begin to trade on relief rather than fear. It becomes, "oh, that wasn’t nearly as bad as we thought it would be". Case in point was the Toll Brothers (TOL) earnings report this morning.
Toll Brothers reported the first quarterly loss in 21 years (if you include the write down of 315 million) and the CEO responds by saying “fiscal 2007 was the most challenging of the 40 years that Toll Brothers has been in business” but the stock rallied more than 15% today as the company whooped analyst expectations of a .77/share loss (which typically don’t include write downs) by posting a .72/share profit (excluding the write downs).
At the top, analysts increasingly high expectations make it difficult for the company to beat leading to a sell off. At the bottom, increasingly lowered expectations creates a situation where a stock rallies on any glimmer of hope.
2. Insider Begin Buying
Nobody knows their company better than the guys at the top, unless of course you’re Kenneth Lay and you don’t know anything. When insiders feel their company is a great value they begin buying shares. Insider selling can occur for a variety of reasons so it’s difficult to place much importance on it, but insider buying particularly in large companies can often indicate a bottom in the stock price.
Case in point, NVR Inc (NVR) CEO Dwight Schar. He recently picked up 50 million worth of shares in his company. That’s still less then what he paid for his home in 2005, which at the time was the most expensive house in US history (Revlon founder Ron Perleman’s home), but 50 million isn’t the kind of bet you make in your company if you feel your shares are going much lower. Not a bad investment. He’s up over 25% on the position in just one month.
At KB Homes (KBH) two VP’s dabbled a bit and picked up about $93K worth of their company stock in late October/early November.
3. Capitulation in Stock Chart
Not all bottoms will show capitulation but it’s certainly another clue that I look for. It’s characterized by a day or full week in which the stock closes in the upper half of a long range with volume well above average. I haven’t seen this kind of action in the home builder stocks yet, so it’s certainly possible that we retest the lows again with one last bout of big panic selling, followed by a stampede of buyers.
4. Broken Downward Trend in Stock Chart
The best of breed home builders (see below) broke out of shorter term downward trends today but still face tough resistance. Let’s have a look.
NVR Inc (NVR) is my top home builder play because it’s technically the strongest and fundamentally the ONLY home builder to remain profitable every quarter through the housing meltdown. It was the first to break a downward trend back in November and busted through that resistance again in December. Like all home builders, it’s currently overbought in the short term but if I’m a long term buyer I’m looking to add shares between 450 – 500. I"ll have a more detailed technical analysis below
Toll Brothers (TOL) broke through its downward trend line today but doesn’t have far to go before testing the longer term trend line. It’s up nearly 30% in the past couple weeks so I would not be chasing it. I won’t be looking to add shares until it pulls back to 20 or lower. I rank TOL #2 right behind NVR and will highlight the technicals in more depth below.
I don’t feature the charts of DR Horton (DHI) and Centex (CTX) in this report, but they also broke out of downward trends today but are too extended in the short term.
The Bottom Line
The home builders have surged 20 – 30% in recent days on news of the government subprime freeze and anticipation of another Fed rate cut, resulting in a breakout above shorter term downward trend lines in the best of breed home builders. Technically, they are overbought in the short term, but there is some room to run to the upside, perhaps another 10 – 15%. The best opportunities will come on light volume pull backs from current levels. While there are some indications that a long term bottom is close, we’re not out of the woods just yet and the likelihood is very high that we’ll retest the lows of the home builders (anywhere from 20 – 30% below current levels), particularly if the bankruptcy of a major home builder such as Beazer Homes (BZH) becomes more likely. If I were a long term buy and holder (which I’m not), this is an area I’d begin significantly accumulating shares of the best of breed home builders such as NVR Inc (NVR) and Toll Brothers (TOL). Remember the stock price precedes a turn in the fundamentals. That is, well before the home builders turn it around financially, a bottom will have been put in place.
As another indication that the home builders aren’t out of the woods just yet, both the SPDR Homebuilders ETF (XHB) and the Ishares Home Construction ETF (ITB) have not cleared downward trends.
Best of Breed
Based on a combination of fundamentals and technicals I’ve come up with a Top 6 list of best of breed home builders:
1. NVR Inc (NVR):
It takes the top spot because of the big CEO insider buying, best technicals and the fact that the company has remained profitable in every quarter during this housing crash and is expected to remain so. CEO Dwight Schar has also been through a meltdown before, nearly bankrupting NVR several years ago. I’m sure he’s smart enough to learn from those mistakes. The second time around, Schar avoided the risky land investments and went with an approach called optioning where the builder makes a small down payment for the option of purchasing the plot of land in the future. Only when the contract is signed on the sale does NVR purchase the land and build the home. It’s a common practice among home builders now, but apparently NVR has done a better job of not over purchasing land.
The chart below provides a look at a longer term weekly chart to get a better sense of where it’s been and where it might be going. A few things stand out to me. One being the big support at level at 400, an area it has bounced from not only recently but in the summer in 2006 as well as summer of 2004. If I can get shares around 400, you can be sure I’ll be buying, but quite frankly I don’t think NVR sees those levels again. Depending on what the overall market is doing, what the housing market is doing and the individual action in NVR I’d be looking at shares in the 450 – 500 range. Note the potential double bottom base outlined in blue? If in fact this is a valid double bottom base, 400 is the bottom and we can expect a run to 850 – 950 within the next year.
2. Toll Brothers (TOL)
Like NVR, TOL recently tested an important level of support at 19 (a level it found support at back in 2004 as well) and bounced. Yes, there is some room to run to the upside but I wouldn’t be chasing it. Once the euphoria of the subprime rate freeze and looming Fed rate cuts wears off, home builders should pull back and offer a much better entry. Just how much is anyone’s guess, but keep an eye on on resistance above from the long downward trend line (in blue) and support at the bottom around 19. Price should continue to get squeezed between those two points over the next several weeks creating a big triangle formation. This will be the moment of truth for TOL. A break up out this formation indicates the likelihood of a long term bottom while a break down below 19 indicates further deterioration ahead, possibly to the next level of support around 16.
Best of the Rest……
3. DR Horton (DHI)
4. Centex (CTX)
5. Ryland Group (RYL)
6. KB Homes (KBH)
That concludes my initial report on a potential home builder bottom. What I plan to do is provide an update report every month for the next 6 months, so stay tuned!
Disclaimer: I currently hold no positions in any of the individual home builder stocks mentioned above or the two ETF’s.
Today I’m pleased to bring you a report on the oil/gas engineering industry written from the perspective of someone who has more than 40 years of experience working for major oil corporations as well as smaller companies all across the globe. Robert Williams has extensive petroleum, water and electrical industries experience regarding Supervisory Control and Data Acquisition (SCADA) systems, Management Information Systems (MIS/IT), Distributed Control Systems fire & gas/emergency shutdown systems, instrumentation, metering, communications, security/CCTV and electrical engineering on such major projects as Shell Bonga FPSO, Saudi Strategic Storage Project, Libyan Water Pipeline, Trans Alaska crude oil pipeline, Alaska Natural Gas Transportation System, Occidental Piper B and Saltire offshore platforms and many other worldwide projects.
Oil & Gas Industry Perspective Part I
by Robert Williams, PhD, P.E.
This is the inauguration issue of the Oil & Gas Industry Perspective published with the express purpose of keeping you abreast of industry trends and developments and to potentially identify investment opportunities. Industry sectors involved are the Integrated Companies, Services and Equipment Companies and Operations Companies. All these industry sector companies are involved with future developments capital expenditures either for exploration, production, distribution or for technological advancements. Not included in these Oil/Gas industry sectors is one industry which is highly involved with oil and gas developments. This industry is the engineering companies that are listed under engineering because many are also diversified into environmental, power, federal government, pharmaceuticals, nuclear and life sciences engineering projects.
1. All across the world major oil companies, Exxon, Royal Dutch Shell, Chevron/Phillips, Marathon, etc. and Middle East national oil corporations, e.g. Kuwait are all in various degrees of revamping their existing refineries with the express purpose of increasing overall refining capacity, and where necessary, adding heavy crude oil refining capability.
2. Major capital expenditure projects are financed by the continuously increasing crude oil prices. Current crude oil prices are sufficient to provide a return on investment and in most cases the necessary capital is already justified and committed to the refinery expansions. Refinery revamp projects are currently ongoing in California, Texas, Louisiana, Michigan and other states. Front End Design (FEED) and Engineering Procurement Construction (EPC) contracts have been placed with engineering contractors who have specialized skills to complete these projects.
3. Specialized skills include positive experience on similar projects, project management capability, project control systems with competitive rates and qualified engineering, procurement and construction personnel.
4. In 1982 there were 301 refineries in the USA but in 1992 there were only 199; 2002 only 153 and in 2007 the number of refineries was down to 149. Crude oil pricing went the opposite direction from $18.91 in 1990, to $23.17 (Jan, 2000); $28.00 (Jan, 2004); $35.16 (Jan, 2005); $55.12 (Jan, 2006); $54.63 (Jan, 2007); $94.44 (Nov, 2007), and January 2008 100 ++?? (Source: US Energy Information Administration) [Hyperlink to www.eia.doe.gov]
5. Gasoline refining in the US has not kept up with demand with the shortfall being made up by imports with an estimated current import of 1 million barrels. A good size refinery is about 250,000 barrels per day of crude oil.
6. No new refineries have been built in the US for the past 25 years.
7. Refined products consumption will continue to increase as will the political pressure for gasoline imports independence.
8. During the 80’s and 90’s the oil/gas industry suffered a major downturn and no major projects were initiated to replace older equipment and technology. A result is the ongoing maintenance shutdowns for US refineries.
9. Similarly, the major oil/gas companies and the EPC engineering contractors divested themselves of professionally qualified and experienced engineers of all disciplines. Newly assigned engineering projects are being partially staffed from returnee engineers, retired engineers and new graduate hires. A major experience gap exists in staffing these projects.
10. During the industry downturn there was a trend toward lump sum contracting for global capital projects. This trend has now reversed back to the cost plus reimbursable projects.
11. An EPC contractor does not make any major capital expenditures for the refinery revamp engineering projects since they only provide the necessary business requisites to supply experienced project managers and engineering personnel and supporting infrastructures, of buildings, computers, networks, etc.
12. One EPC contractor outlines the backlog of engineering contracts of up to five years without any new contracts being granted.
13. Domestic refining capacity is expected to grow based on the current capital expenditure projects to revamp existing refineries but this will be offset by increasing consumption. Is this another refining industry overbuild? It may very well be but this will not become apparent for quite a few years until these refinery revamp project deliver the increased production capacity which could be utilized to reduce crude oil and petroleum products imports rather than flood the US market.
14. In previous years capital investment was directed to lower carbon emissions and to meet low-sulfur regulations. These environmental investments do not expand capacity as the currently ongoing revamp projects will as they are also designed to increase heavy crude oil refining, i.e. Canadian tar sands.
The oil/gas engineering companies combined performance charts (see chart) positively indicates that profits are being made and that it is not too late to invest in these companies. All are indicating increasing earnings and the Insider Perspective is that from three to five years of backlog are recorded by these companies. Backlog means that they would be busy for three to five years to complete existing client-approved capital expenditure projects without consideration for any new projects being negotiated or bids under preparation. Please note that recent markets declines do affect these companies’ stock pricing but may very well provide excellent entry points depending on your market timing criteria. Weekly charts provide trend direction determination whereas daily or even 60-mintue charts provide guidance as to trade entry points.
In summary, the oil/gas engineering industry is currently investing on crude-oil dependence growth which is a fundamental sign for improved earnings and rising stock prices.
Disclaimer: No position is owned in any of the companies written about above.