How to Make 50% with an Energy Play Rebound

You’ve probably heard that old piece of investing advice to “Buy when there’s blood in the streets.” Basically, it means that there’s a geographical area, business sector or line of business that has fallen seriously out of favor. Thus, there are screaming bargains available, if you have the guts to step up and assume the risk.

Run, and Don’t Look Back?

Still, that “blood in the streets” line is intimidating. There’s blood in the streets because something really bad is happening. People are dumping their shares. They want out. They’re running away and not looking back.

Often as not, people make tracks for a darned good reason. There might be a war or revolution in some area. That could lead to seizure or destruction of assets, and massive investment losses. Think of Iran in the late 1970s, or Venezuela more recently.

Then there are business sectors that crater, such as we saw with the asbestos business about 20 years ago. The class action lawsuits hit so fast and furious that many old names, like Johns Manville, were belly up before you could blink an eye.

Sometimes there are terrible events that just wreck a company’s stock. A few months back, for example, Toyota cracked up. This iconic Japanese firm got hit by a rash of news reports of unsafe vehicles, with bizarre acceleration problems and bad brakes. The lawsuits went national, indeed viral. Within days, Toyota went from one of the most admired companies in the world to being the butt of jokes from late night comedians like Jay Leno.

Or look at BP — also known as “British Petroleum,” when U.S. politicians speak its name. BP blew out a deep-water oil well in the Gulf of Mexico, and even two months later is unable to control the well or clean up the oil slick. BP stock crashed, and now it’s turning into an ATM for damage claims. As you surely know, BP even had President Obama ripping into it, in a speech from the Oval Office. How much worse can the bad publicity get? (I just hope they stop that gushing oil well!)

Opportunity Inside Misfortune?

In this article, I’m not going to dwell on foreign revolutions, or how an industrial product has fallen out of favor, or how BP is a reviled name anymore. But this kind of discussion is as good a way as any to lead into a new real-time recommendation for ESI.

Where am I going with this? Is there blood on some street somewhere? Not exactly. It’s more like there’s oil on the water — BP’s oil. And we have a chance to profit from it. Just so you understand, I’m truly sorry about the Gulf of Mexico oil disaster. But it’s giving us a chance to profit.

Yes, fate has offered us an offshore energy opportunity. Of course, BP has made a mess of its deep-water well. In turn, President Obama has banned new deep-water drilling in the Gulf of Mexico for six months (yeah, right, try indefinitely). Plus, we’ll surely see tighter regulations over drilling in shallow waters.

Point is the Gulf of Mexico has now picked up the reputation as a problematic locale for future offshore energy development.

So what are we going to do?

We’re going to invest in a beaten down natural gas driller in the SHALLOW waters of the Gulf of Mexico. The shallow water drilling will come back soon, I believe, and it offers some incredible investment potential.

In the wake of the BP disaster, the Obama administration banned new deep-water drilling, and interrupted the shallow-water work, as well. One shallow-water deep driller in particular took a hard hit, and its share price tumbled. But now the market has begun to recognize that this driller won’t see a material impact from the deep-water moratorium on drilling. It will keep on drilling, but in shallow waters. The development momentum and industrial fundamentals still favor what it’s doing.

Thing is, in shallow water, less expensive jackup rigs can be used, instead of the much more costly deep-water units. Also, in the shallow waters, it’s cheaper to stage logistics and exchange personnel from shore. Plus, it’s much easier to access and maintain the safety equipment. For example, in many shallow water projects, it’s possible to place the blowout preventer ABOVE the water line.

Also, drilling in shallow water closer to shore allows for the leverage of existing production infrastructure, such as pipelines, power cables and communication systems. This allows for rapid development after a discovery, with the added bonus that the reserves are much bigger — because in the ultra-deep play, the structures are so much larger.

So while deepwater drilling faces some obvious obstacles for the foreseeable future, things are looking good for shallow water drillers who are ready to pick up the ball. And things are looking really good for investors who know where to wade in even when there’s blood in the streets…or oil in the water.

Until we meet again,
Byron King
Whiskey & Gunpowder

June 28, 2010

The Daily Reckoning