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Message In A Hard Hat

By Matt Badiali, editor, S&A Resource Report
Friday, August 18, 2006

Walking along the beach fishing the Atlantic Ocean, I came across a barnacle-covered hard hat with a Diamond Offshore logo on it.

I knew the hat had been in the water a long time because the goose barnacles were the size of peanuts. I found it one day last year after a couple of days of stormy easterly winds. The sky was still gray, but I was determined to get out to the beach.

It was the first day after a big blow, so the fishing wasn’t good and flotsam covered the beach. Big logs, trap buoys, and other rubbish lay in a long ribbon. I’m a born beachcomber, so I rambled along and looked at the debris. It was among this stuff that I came across the hard hat.

Diamond Offshore is one of the largest deepwater drilling companies in the world. However, the presence of one of their hard hats on the coast of northwest Florida is odd. We don’t allow oil drilling off our coast, and the nearest rig is probably out in the Caribbean or off Louisiana.

The possible origins fired up my curiosity, so I brought the hat home...

My first thought was that it came out of the Gulf of Mexico, but there was another strong possibility. The current that becomes the Gulf Stream and warms the Florida Coast receives water from a current that flows near Brazil... which is a booming place for deepwater drilling.

Diamond Offshore has four ships there right now... three of which were there at the right time for a hard hat to fall off a rig and drift several thousand miles to Florida.

The rigs are working for Petrobras - Brazil’s state-run oil company and one of the finest major oil companies in the world. That solves the mystery of where the hard hat came from. Now let’s talk about the important message it contains...

First, I need to explain the distinction between offshore, deep-water drilling and the anatomy of continental shelves.

A continental shelf is really just the part of the continental landmass that’s submerged by water. Typically, a continental shelf might stretch 200 miles out to sea and reach about 500 feet deep.

At this point we reach the ‘shelf slope break.’ The sea drops off as much as a couple of miles here. In the shallow water of the continental shelf, drill rigs stand on fixed legs. They call this offshore drilling. But beyond the continental shelf, you need a special kind of rig, either a drill ship or a semi-submersible. This is what they call deepwater drilling.

Ten years ago, Brazil had no deepwater reserves. The technology wasn’t there. Now 70% of Brazil’s current production and 80% of its proven reserves (13 billion barrels) are located in water over 1,000 feet deep, and Brazil has become one of the world’s major suppliers of crude.

I see this trend repeating itself all over the world. If I had to go out on a limb here, I would say deepwater drilling is the future of the oil industry.

As traditional reserves deplete, and as our knowledge and technical abilities increase, we’re going to source more and more of oil from the deep sea.

The deepwater angle is why I like Petrobras as an investment. When it comes to this kind of drilling, they’re among the best in the business.

If deepwater drilling turns out to be as important as I think it will be, they might lay claim to one of the best performing share prices in the business as well.

Good Investing,

Matt Badiali

Market Notes


In our July 24 issue, we pointed out how individual investors are at record levels of bearishness towards stocks.

Blame it on the Middle East, terrorists, high oil prices, a recession, or whatever, folks are bearish. And as any good contrarian knows, it’s a great time to load up on stocks when bad news and bearish sentiment reigns.

Our chart today shows how this trade is working out… that “buying the bad news” is paying off. The Nasdaq 100 has gained close to 7% in the past three weeks… and leveraged bets on this trend are paying off big time. 

As wild man Jim Cramer would say… Booyah!

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