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The New Hedge Fund Free Lunch
I received another scratchy, crackling cell phone call from my drilling buddy in the Texas natural gas fields today. You could almost choke from the dust on the line.
He told me that the BP Gulf disaster was turning the fundamental assumptions of the oil industry upside down, and that sharply higher oil prices were in the cards, probably $100/barrel by year end.
Major oil companies with deep pockets at risk were rushing to offload their existing offshore leases and partnerships in producing wells to avoid BP’s potential $30 billion hickey. If nothing else, the majors have learned that liability caps are nothing more than wishful thinking. They can only speculate what a new round of vengeful regulation will cost them.
Hedge funds looking for “the next big play” were willing buyers, but only at substantial bargains. We are witnessing nothing less than the birth of a new distressed junk market. It is all part of a repricing of risk that values offshore assets at a discount, and onshore ones at a new found premium. Only big swinging dicks need apply, as minimum participations are going for as much as $50 million.
The impairment of Gulf assets is also breathing life into the once moribund natural gas market. Enough gas supplies are being left under the Gulf to offset the enormous new production coming online through the new ‘fracting” technology, where everyone is using a volume strategy to offset plunging prices. Gas is not heading off to the races, but supplies will be tight enough to sustain it in a $3.50-$5.00 trading range for the next 18 months.
It all makes me want to go back and buy more ExxonMobil (click here for my piece) and Occidental Petroleum (click here for the report).
I’d love to get more out of my friend, but I don’t think my aged, arthritic back could take another three hours driving down washboard roads in a beat up pickup truck with no springs to track him down at his newest drilling location. Besides, I already have enough signed 8 X 10 signed glossy portraits of George W. Bush to last a lifetime, and I didn’t want to hurt his feelings by turning down more.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Agreed. Developing natural gas would increase employment and investment in something tangible while decreasing our dependence on oil. If only John Edwards could have kept it in his pants.
Obama is a fucking moron for not embracing our suddenly plentiful natural gas resources and encouraging it's E&P in every way. Gas is no silver bullet but it's cleaner, abundant, it works and it's over here.
He could have plausibly claimed to be killing at least three birds with one stone by "going green" (greener anyway), stimulating American industry and weaning the US off foreign oil. I'm no political consultant but the term "win-win-win" comes to mind here.
Instead he goes literally tilting at windmills and the usual unicorn and rainbow bullshit about electric cars and replacement windows. And now apparently he's managed to scare away viable oil production in the Gulf as well with legal and regulatory shock and awe. Nice work. $100 oil should help out the "recovery" nicely.
I thought that if things got really rough the British government would somehow facilitate the sale of BP's US jurisdiction assets in an effort to salvage value for their many domestic shareholders. Now it looks like BP and other major integrateds are just going to walk away from this part of the business.
Capital flows to where it's welcome and stays where it's well treated.
I'd prefer being long oil in euros or sterling....