“The Next Exxon” and “Next Transocean” Robert Hsu

By Travis Johnson, Stock Gumshoe, June 12, 2008

Of course, the big question is: does anyone really have a speculative fervor to find the next ExxonMobil? I suppose if you can find an oil major before it becomes a major you’re going to do great, but in recent history XOM has not been such a great deal. Oil has gone from roughly $30 a barrel to $130 a barrel in five years, during which XOM has more or less doubled. A 100% gain is nothing the shake a stick at, of course, but if they had any barrels of oil just sitting around during that time the oil itself would have gone up in value by more than 300%.

But anyway, everyone knows ExxonMobil, and since they are currently the most profitable public company in the world (in terms of sheer earnings), we all hear about them all the time — when they’re booking those record profits, or when they’re fighting off efforts by the Rockefeller scions to change their business practices, or, on occasion, when their CEO testifies that no, thank you very much, they’d prefer not to pay any extra taxes on their profits. Everyone knows them, so it’s a natural comparison for any touted oil company.

Which brings us to our point, of course — and faster than usual, you may have noted. Robert Hsu has been touting this company for a little while now, trying to drum up some subscribers to Asia Edge, which is his more expensive “greater Asia” newsletter that buys companies that are influenced by the rise of China (as opposed to his more direct China plays in the China Strategy service).

“It is the largest find in a generation and it belongs to one oil company.

“And this one unknown company suddenly has the prospect of becoming the next Exxon.

“The news, still unreported in the general press, is about to rocket our two top buys here at Asia Edge into the spotlight and hand my subscribers at least one double, maybe two.”

The argument is, essentially, that the wild rise in the price of oil is due in large part to the rise of Asia as an oil consuming region — particularly China.

“The reason gas prices are so high in the first place is the Asia juggernaut. Two out of every three oil tankers rumbling through the Straits of Ormez these days turn east, towards Shanghai, not west towards New Orleans.

“The mad scramble going on in Africa right now, the boom in Brazil, the politics in Russia and soon, the election here in the U.S., all have oil at the epicenter.

“And Asia is on the trigger.

“So this giant discovery comes to light at a very, very special moment.”

Sounds pretty good, eh? Make you want to take your oil tanker out of mothballs and get out there picking up some loads bound for Shanghai? Or maybe put up a drilling rig in your backyard to see if you’ve got a few barrels of crude under the basement? Lot of that going around these days.

Hsu tells us about this massive new oil discovery, which he says has fleets of oil rigs lined up “155 miles east of Rio” — that being Rio de Janeiro, of course, with the offshore oil discoveries being discovered in Brazilian waters.

There are actually two stocks teased here — the one he describes as a drilling company that has a good position in Brazil and that “Transocean would love to buy” — he doesn’t actually call it the “next Transocean,” that was my own little magical touch … and the oil company that he calls the “next Exxon.”

Let’s look at the driller first — here are the clues:

There are a very small number of ships and rigs capable of drilling in the difficult conditions offshore Brazil — not because it’s particularly rough like the North Sea, but because the oil is so deep, and is sealed under a hard crust of salt. So the owners of those rigs are demanding a pretty penny for their services … which should lift the hulls of all of these companies, as you might notice it has. But Hsu has one particular one in mind:

“It’s booking into 2011 at $450,000. Word is, rates could top $600,000.” (They already have for some rig owners, so this text must be a little old)

“Earnings are growing at a breakneck 128%, debt is zero and the big guns like Transocean would love to snap it up.”

“Asia Edge subscribers saw this stock shoot up 34% in 4 weeks recently, then consolidate as the price of oil dropped. Beautiful. Buy it and don’t look at it for one, maybe two years.”

Think that’s enough, clues-wise? Well, it all depends. There are only a half-dozen companies in the world that could legitimately claim to be “top drillers” offshore, so our universe is small. And a couple of those are not particularly active in Brazil, so it shrinks a bit further …

And the Thinkolator can with at least some degree of certainty announce that this is …

Pride International (PDE)

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The 34% rise in four weeks “recently” was a couple months back, when it was first announced that SeaDrill had taken a near-10% stake in Pride and the takeover rumors started circulating (again — I helped goose those rumors a couple years ago, for the same two companies, though I was clearly very early).

Pride arguably hasn’t gotten the same level of attention as have Transocean, Noble, or Diamond Offshore — partly because PDE also has a small collection of land rigs (mostly in Chad), and runs a large number of old, shallow-water rigs, mostly in the Gulf of Mexico (including a lot of jackups leased to Pemex). But they do have a pretty big deepwater fleet, albeit not as many of the really brand-new high spec rigs as some of their competitors — and many of their most capable rigs and drillships are leased to Petrobras, at rates up to a bit over $500,000 a day (most of them are a bit older and have shallower capability, so they’re more in the $200-350,000 range). Pretty nice stuff. So the valuation might look fairly attractive if you decide to research it further.

Frankly, I think anyone that has a good fleet of deepwater rigs is likely to make a mint for the next eight years (for these most capable ri