I am very confused by a comment made on Jim Cramer's blog at thestreet.com regarding RIG. In the blog he states:"RIG's got contracts out until 2012 that have gigantic day rates. These are hard contracts to get out of, but I have to believe that some of them have been rented by the ubiquitous hedge funds hoping to scalp a gain and sell them to others, and certainly some are just rented by gunslinger companies that are running out of money at these prices."Can someone decipher "rented by the ubiquitous hedge funds hoping to scalp a gain and sell them to others" for me? How could a hedge fund affect a long-term contract between RIG and an oil producer? As I understand, a contract is a contract and unless the company in that contract files Chapter 11 or otherwise, they are on the hook for the day rates. Is this not true? Scanning RIG's day rate schedule, there are some very big names in the oil business with a lot of cash that don't seem likely to go under during this downturn. But maybe I'm blind to some fact.BTW, I'm not looking for short term advice here. I'm investing for the long term and RIG seems like a good long-term play. Maybe I'm wrong...
I do not understand what Cramer is saying either. That being said, I do believe there are ways (not easy ways) that parties can opt out of a contract. I do own RIG as a long term play (5+ years), and I am considering buying even more at these reduced prices. I see that near-sure thing stream of money coming in over the next few years and it is nice to count on that revenue.
Cramer has to say something about every company in the universe. The hedge fund story sounds plausible, but is just doesn't appear to hold any water.Strange, all you have to do is look at the fleet update and you can see the contracts are with BP, StatiolHydro, ExxonMobil, Reliance, Chevron, and other big oil companies.Also, going through their quarterly report, dayrates and utilization through the 3rd quarter were still very strong. I guess the fear is that oil prices will continue falling and contracts will be canceled (if possible), or at a minimum, new contracts will have dayrates back at 2004 levels ($250,000/day instead of $500,000/day).For me, I'm planning to hold RIG for many years. The big problem right now is that oil demand is falling due to the weak economy. Yet, the big new oil reserves continue to be found offshore, not on land. Chevron, BP, Shell, ExxonMobil all need to replace their reserves. Where are they going to do it? Most likely in the deepwater GOM, offshore Angola, or other deepwater drilling locations.So, barring global financial collapse and a 10% reduction in demand worldwide, I would expect we have a rough patch for a few years until the recession works itself out. After that, assuming the world has not come to an end, RIG should do very well indeed.
And speaking of StatiolHydro, here's a sobering report (may require that you register for free):http://www.investorvillage.com/smbd.asp?mb=4146&pt=msg&a...<snip>StatoilHydro frankly admits: The company expects that specific projects such as Lavrans and Trestakk will be postponed due to the financial crisis and low oil price. The fall in oil price is dramatic. This will affect us, especially in combination with very high cost levels from our suppliers," says StatoilHydro's director of all work on the Norwegian continental shelf, Øystein Michelsen."We should be able to live with an oil price of 50 dollars, really. In the long-term, we will see an increased demand for oil. But a lot of what we do today is not sustainable because of high costs, especially when it comes to rigs," says Michelsen.Audience stunnedHe stuns the audience somewhat at the December conference in Kristiansund, as he starts to get specific. In front of a full hall, where most people dream of major development projects off the coast of mid-Norway, Michelsen gets out a map and takes his foot off the accelerator:"We need to be even stricter in the future, and show greater capital discipline. We don't want to stop anything that is sensible, and do not have a complete overview of what lies ahead," says Michelsen, and squirms when he is asked:"Which projects on your map may be halted by today's situation?"" Lavrans and Trestakk," answers Michelsen after pondering a little.</snip>I guess a few questions worth asking (and I don't have the answer or I'd give it) would be, how costly is it for a company like StatiolHydro to cancel a contract? Under what circumstances can they cancel? What recourse does a company like Transocean have in the case of a cancellation?Derek
I wouldn't listen to anything Jim Cramer says too closely. His investing strategy may work for him, but every time I have listened to him I've gotten burned, and conversely, the times in which my opinion has differed with his, I've profited.The contracts going into 2012 are assured money for years to come for RIG, which I think of as a good thing. As we all know, RIG has more equipment than is in use right now, so if more lucrative day-rate offers arise, they have the equipment to fill the order. I like RIG's positioning in the market right now, especially with the price of oil climbing.
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