I'm bullish on oil. Oil is not just a demand issue, it is a supply issue as well. About 53% of the proven oil wells come from Middle East. For the past 5 years, there has not been significant new oil reserves been added, and existing oil wells are in declining stage.
Currently 1 person in China and India are consuming less than 2 barrels of oil a year. While 1 person in US and Japan are consuming more than 15 barrels of oil a year. As China and India economies continue to grow, more and more people in China and India will own cars, refrigerators, TV, air-conditions, and this will raise current consumption of 2 barrels of oil to 10 barrels of oil in the next 5 years. At that time, oil price could be priced at $250/barrels then.
Whenever I told my friends that oil will eventually rise to $250, many said it is impossible, how are people going to drive car at this price? From my experience in the commodities market for the past years, pricing of a commodity depends just 2 main factor: supply and demand. Oil is facing the situation whereby supply is falling, and demand is rising at tremendous rate. And the substitute for current oil is more expensive oil price.
So if you have the same belief as me, then you should invest in stocks that would benefit from high oil price. Offshore and deepsea drillers are the obvious winners. Tight supplies of drilling rigs and soaring demand from energy companies exploring for oil in deep water have pushed up daily rates for offshore rigs.
The best company in this sector is Transocean Inc. Transocean Inc operates mobile offshore drilling units, inland drilling barges, and other asset utilised in the support of offshore drilling activities worldwide.
At current environment, there is very little oil left under the ground. Oil companies have to drill oil in the ocean. Transocean Inc is few of the companies that offers deep sea drilling facilities, hence they are able to command a high profit margin, and barrels to entry is low.
I believe deepwater cycle will extend well into the next decade and expects upside to dayrates for near-term availability.
Transocean owns two ultra-deepwater rigs with availability in 2009 and 2010. The demand for these rigs is expected to exceed supply through 2011, pushing dayrates above the $550,000 level.
Historical P/E is 17.29x, forward P/E is 11.26%. Basically market refuses to believe that oil price will remain high for a long time, this is why valuation is so low. Hence this explains why this stock is so cheap, tremendous upside for this stock.
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