Mr. Gerry: Demand for hydrocarbons has obviously fallen rather substantially, and it has driven a sizable fall in energy prices. Capital spending from the independent E&P operators has fallen off a cliff really. We divide the oil service universe into two groups — those that are driven by oil and those that are driven by natural gas. As you may know, natural gas is the predominant driver of all activity in North America. It's the biggest oil service market in the world, and it's where the bulk of our oil service companies generate the majority of their revenue. Unfortunately, natural gas fundamentals look substantially more bearish than do oil fundamentals.
TWST: Why?
Mr. Gerry: I'll start with oil. It's all about supply and demand. When you look
at oil from the demand perspective, yes, things are pretty hazy right now.
However, offsetting demand degradation is an underlying supply problem. Once you
see an economic recovery, I think you'll see oil prices bounce back to very high
levels. That's because non-OPEC supply is rapidly falling. It was already
peaking before the credit crunch, and, as spending slows, supplies will taper
off quite a bit. So essentially, supply constraints will become a problem once
the economy stabilizes. On the gas side, again, it's about supply and demand.
Over the last five years, we've made significant discoveries and we've gotten
much better technologically at getting gas out of the ground. So we are drilling
much more productive wells that have created a massive overhang of supply. Now,
the demand side is no different from oil. Falling demand due to the economic
crisis is going to hurt natural gas as well, but there's also an underlying
supply problem for natural gas.
Tickers included in this excerpt: DO, NE, PDE, RIG
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