|Matthew R. Simmons - the US is heading for an energy crisis
Review from the Pareto & Simmons Oil & Offshore seminar on May 31
The message from todays conference was very exiting
Matthew R. Simmons, President of Simmons & Co, emphasized that the US is faced with a far more serious energy challenge than commonly perceived. The US needs a "Marshall plan" to solve the energy issue. There are problems in all aspects of energy and there are no short-term fixes.
California is facing an expected 15 hours per week of electricity blackouts this summer. Gasoline supply around last year's low levels. Supply of natural gas is not rising despite record drilling and the import of both crude oil and refined products are at record levels.
The conference also included presentations by Tom Bates, Roger Read and Tormod Høiby. These questioned the pricing of Norwegian oil service stocks and the pricing of upstream companies relative to the super majors.
Please find links to the presentations to the right in PDF format.
Matthew R. Simmons - The perfect storm
Economic growth is impossible without energy growth. At the moment the US is facing a serious energy crisis. The problems relate both to electricity, natural gas and oil. Natural gas together with coal is the two most important input factors for power production. The Natural gas supply however has been flat over the last five years, despite a strong increase in the number of working rigs. It is an issue whether the oil companies are able to increase gas production. Assuming that the increased natural gas demand is met and that the annual growth in electricity consumption is 2.8%, US will still need between 1,300 and 1,900 new power plants in the next two decades. There are also other bottlenecks such as the transmission lines. According to Mr. Simmons the problems are so serious that the US needs a trillion dollar "Marshall plan" to solve it. This again demands high energy prices.
Tom Bates - Technology and the value paradox
From 1985 to 2000 the finding cost per BOE has fallen from around USD 9 to USD 2. Improved seismic technology is the single most important factor driving this trend. However, this performance does not show up in the seismic companies accounts. From 1995 to 1999 the eight top seismic companies had total revenues of USDbn 17.6, but only a profit margin of 2.2%, after cost of capital the industry "destroyed values" of more than USDbn 2. History has shown that technology can reduce costs, but so far the benefit has benefited oil companies and not oil service companies.
Roger Read - A valuation comparison or conundrum
Norwegian oil service companies are traded at a discount to US peers both on earnings and cash flow multiples, despite quite similar EBIT and EBITDA margins and better outlook for earnings and cash flow growth for Norwegian companies in 2002. Mr. Read pointed at some factors that can explain some of the difference in pricing: Low visibility outside Norway, lack of marketing by management, limited free float and the dollar appreciation.
Norwegian companies are still traded with a huge gap compared with international peers. As an example: Last year we focused on the difference in pricing between Hydralift and Varco. Since then Hydralift has rallied more than 150% but because of superior earnings growth Hydralift is still priced at half Varco's multiples. Furthermore we focused on the upside potential in Norwegian E&P. After 25 years of on par performance with the likes of ExxonMobil and BP, Norsk Hydro has been flat in the last 4 years while BP and ExxonMobil have tripled in value. With normalized finding & development costs on the NCS this gap should close.
Colin Welsh - Simmons & Co
A prolonged up cycle is now visible with shortage of people, equipment, capacity, deepwater expertise and technology. However, there are ready availability of finance for Norwegian companies that aims to grow internationally