The Rude Awakening
Laguna Beach, California
Thursday, March 1, 2007 ------------------------------ - Sinking wells for shrinking supply,
- Hunting for plays in natural gas,
- The law of diminishing returns - friend or foe?
------------------------------ Eric Fry, back in Laguna Beach, but still recalling Miami Beach, reports… The tanned, young specimens that roam the sidewalks, beaches and nightclubs of Miami's South Beach do not alter their carefree lifestyles when the Chinese stock market tumbles 9% in one day. Nor do these "hardbodies" spend any less time lounging on beach chairs or slinking past velvet ropes or pouting for cameras, just because the Dow Jones Industrial Average plummets 416 points - in the process erasing $600 billion of stock market wealth from the face of the earth. Indeed, these genetically privileged souls do not curtail any visible aspect of their hardcore leisure, even when hundreds of billions of dollars of real estate wealth vanishes directly beneath their Havaiana sandals. Florida real estate prices may plummet and global stock markets may tumble, but the young and beautiful of South Beach will still be young and beautiful. And they will still play all day and still party all night…until age intervenes. Come to think of it, a South Beach fashion model is not so different from the global energy market. Both rely on a finite resource; but both tend to ignore this inconvenient truth. Youthful beauty will fade away and disappear as certainly as global hydrocarbon supplies. There is one major difference, however. The human gene pool will continuously replenish the world's supply of youthful beauty. But the planet earth will not continuously replenish the world's supply of hydrocarbons. Day by day, barely perceptible portions of the world's oil and gas reserves vanish into the atmosphere. Day by day, therefore, the struggle to find and extract the remaining oil and gas supplies becomes ever more challenging. This struggle has become especially challenging here in the U.S., where the average natural gas well produces ever-shrinking quantities of the precious, clean-burning fuel. The number of U.S. drilling rigs in operation is rising sharply, but natural gas production isn't rising at all. "Over the past decade, North American natural gas production has grown more and more drilling-intensive," explains Dan Amoss, the editor of Strategic Investment. "The facts speak for themselves. No matter how many holes the natural gas companies sink into the ground, they cannot seem to increase production. So it looks to me like they're going to be sinking a LOT more holes in the ground. And that's very good news for the companies that provide drilling services, infrastructure and support." In other words, more drilling rigs means more business for somebody, as Dan explains below… [To read previous Rude Awakening columns by Dan Amoss about investment opportunities in the energy sector, click on the links below: The Death of Cheap Oil All Aboard! ------ Resource Trader Alert ------ High-Ho, SILVER! Those who heeded Kevin Kerr's call banked 400% in just 34 days on this "sterling" options play - one of the 10 Triple Digit winners he picked in 2006… Join the Maniac's rampage and YOU could rake in even more than this - and faster - as the global commodities crunch escalates. Click Here To Read On. ------------------------------ Drilling Down
By Dan Amoss If the "law of diminishing returns" could ever be repealed, energy exploration companies would certainly vote in favor. But energy services companies would not. Indeed, the law of diminishing returns may be the energy services industry's staunchest ally, as well as the primary reason why stocks like Grant Prideco (NYSE: GRP) and National-Oilwell Varco (NYSE: NOV) are likely to reward investors over the coming decade. The North American natural gas industry is a real-time illustration of the law of diminishing returns. Exploration and production (E&P) companies are sinking an ever-growing number of wells, but extracting an ever-shrinking quantity of natural gas. In other words, the North American natural gas industry is becoming very "drilling-intensive." That's bad news for the E&P companies, but good news for the folks who provide the drill rigs and pipes and other equipment that the explorers use. The following charts illustrate the rising trend in drilling intensity. This data is publicly available on the websites of the Energy Information Administration (EIA) and oilfield equipment and service company Baker Hughes (NYSE: BHI). 
The blue line is the Baker Hughes natural gas rig count in the "lower 48" United States, including offshore basins. By "gas" rigs, Baker Hughes refers to rigs drilling for natural gas in U.S. territory. Out of the total U.S. rig count, gas rigs now comprise about 84% of active rigs, with oil rigs comprising the other 16%. As you can see, the past ten years of data refute the oft-repeated assertion: "A surge of drilling activity will lead to a glut of natural gas and cause prices to crash." Obviously, gas prices have not crashed, despite the sharply rising rig count. The second chart combines the two data sets from the first chart. It shows the monthly U.S. gas production, divided by the monthly rig count. A simple regression line shows a clear trend running from 3 billion cubic feet (Bcf) per month per rig ten years ago to 1Bcf per month per rig in 2006: 
What conclusions can we derive from these charts? Well, they lend heavy support to the view that drilling demand will more than absorb any increase in the rig population. Most E&P companies are earning huge returns on invested capital at current gas prices. So they will bid aggressively to put newly-built rigs to work on their drilling projects. Another conclusion? Just maintaining current natural gas production will require a steady uptrend in rig activity. Both of these conclusions lead to one over-arching conclusion: the drilling boom is not over yet. So disregard headlines about the impending wave of new rigs destroying the drillers' profit margins. Instead, keep an eye on the price of natural gas. The trend of natural gas will be the primary driver of drilling activity, and thus, of profit growth at companies like GRP and NOV. -------- Dirty Little Secrets That Threaten Your Wealth --------------- You may not know this…but Washington, Wall Street and Big Media are playing a sneaky little shell game with your income…investments…and financial security. But you don't have to let them win - revealed in the report below are 5 lucrative solutions to pump wealth back into your pocket if and when their secrets and lies explode. They're yours FREE Right Here…as your introduction to our unique and knowledgeable circle:
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