Rig companies like Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO) or Ensco (NYSE:ESV), are contracting work at bargain prices to stay afloat in the ocean, rather than dry in the docks, but they're not being rented out by companies we're used to seeing in the sector. And natural gas is still at the bottom, leaving investors wondering which outlook should be considered when trying to predict the market's next move for oil and gas.
Fool analysts Sean O'Reilly and Tyler Crowe discussed this and what it means for the energy sector. Listen to the full podcast by clicking here. A full transcript follows the video.
Sean O'Reilly: Are there any trends in the energy industry itself that you noticed this quarter?
Tyler Crowe: One of the trends that I was very surprised with -- maybe not completely surprised, but a little more of a greater reaction than I would have though -- you're seeing a lot of rig companies like Transocean, Diamond Offshore and companies like those that have been taking on contracts for rigs. That sounds great, but if you look at the rates at which they're taking them, they are at bargain basement prices.
O'Reilly: Who is doing this?
Crowe: You're getting some exploration and production companies -- not necessarily your big oil companies -- some of the smaller, independent oil producers that are mostly outside of the United States. Guys like Tullow Oil, which is a British Company, Dana Petroleum and things like that. They're taking a flyer on these super cheap rigs.
To give an example, Ensco last quarter had a couple jack up rigs, which working in the North Sea will normally generate $135,000 a day. That's been the average for a jack up rig in the area. This past quarter they took on contracts for $50,000 a day. The idea is that they're just going to keep them working to a certain degree rather than keeping them stacked and paying out money. At least in this way, you can more or less break even.
O'Reilly: Are they at least servicing debts and depreciation with this $50,000 a day?
Crowe: I think it's not necessarily servicing anything other than preventing from having to pay the costs of keeping it stacked in the yard. There are costs associated with these things not at work. So just getting a contract to keep them working and not have to pay those is slightly beneficial.
What it kind of showed me when I saw these was that these companies are really bracing for a longer downturn than they had originally expected or anticipated, even back in 2014 when you saw some companies saying it was going to get rough. Now we're a year in and they're still saying it could get a lot worse.
Taylor Muckerman: Mine is short and sweet. Natural gas it's near a five year low right now.
O'Reilly: It's crazy.
Muckerman: It's just like oil.
Muckerman: No. the last I saw it was $1.80/$1.90.
Crowe: That is the spot market price because a lot of companies like Chevron this past quarter, their realized natural gas price was $1.93. You're seeing a lot of exploration and production companies, in some cases, losing money on every BTU that they produce.
O'Reilly: That's crazy.
Muckerman: Natural gas is the future of power, it's the future of the chemical industry, and yet the price...
Crowe: When it's that cheap it can be the future.
O'Reilly: It's just crazy to think that it was $13 six years ago.
Muckerman: 2012, wasn't it?
O'Reilly: Yeah, even worse.
Crowe: We saw bottoming in 2012 because there was a glut of rigs. It was actually very similar to what we're seeing today in oil, although it's taken a bit longer to clear. In 2012 we had where everyone was talking about natural gas and how great it was going to be and people were giving natural gas companies all the money in the world to go out and drill.
Muckerman: Then they drilled too much.
Crowe: Drilled too much. Low and behold. We're getting the same thing again today where there's too much gas and not enough demand, especially in the United States because we haven't seen a lot of those LNG facilities actually fire up. When those do, that's a lot of demand that's going to start to spark things up.
Muckerman: We saw a spot price of almost $3 at the beginning of the quarter and now it's below $2.
O'Reilly: What's been surprising to me over the last couple of months that the diversity of opinions within the oil and gas sector. I was thinking this the whole time when we were in Houston, Tyler. You've got guys like the CEO of Core Labs and a couple of gentlemen that we spoke to who are quite bullish. They're like "This is silly. This is not going to last."
Then you have these rig companies and you have a couple of the majors that are like "This is going to be lower for a long time." You have BP saying it will be the end of the decade or something before oil recovers. Nobody actually knows what's going on, evidenced by the diversity of opinions.
Crowe: You could consider it the "hope for the best, plan for the worst" situation.
O'Reilly: I was like "Are the rig guys and a lot of the majors saying it's going to go until 2018 or 2019 that oil is going to be below $50; is that them lowering expectations?"
Crowe: I'm sure there is a certain element to that. I would actually feel better with a management team that is bracing for the fact that it could last that long rather than one being like "Hey! 2016, we're going to do great because everything is going to turn right around. Don't worry about it."
O'Reilly: Because you can't know that.
Crowe: Exactly. Nobody knows. To be conservative today and position yourself to be ready when it actually does turn, I think, is a better place to be than to put it on snake eyes and see what happens.
Taylor Muckerman owns shares of Core Laboratories and Ensco. Tyler Crowe owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.