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The Daily Reckoning | Tuesday, December 21, 2010 Deepwater drilling goes into overdrive...just not in the US, One "go anywhere" company for your portfolio consideration, Plus Bill Bonner on why Bernanke is NOT printing money... Offshore Boomtowns A Global Glut of Deepwater Oil...With One Major Exception Joel Bowman Reporting from Buenos Aires, Argentina... It's boom time for offshore drilling. Not in the US, of course, but that shouldn't come as any surprise. After all, there are few "enemies" Congress pursues with more gusto than that of conspicuous productivity. Almost three weeks have past since President Barack Obama passed a 7- year moratorium on drilling for oil and natural gas within 125 miles of the Florida coast. And still, unremarkably, the industry soldiers on...elsewhere. Indeed, production from deepwater drilling, having doubled over the past five years to some five million barrels per day, continues to capture a larger piece of the total global supply pie. Thanks mostly to new discoveries and ongoing investment in exploration and development in Brazil and West Africa, that figure is projected to double by 2020, when contributions from the deep will make up more than 10% of total global production. Of the deepwater discoveries made during the past decade, Brazil boasts 7 of the top ten, as measured by volume. At very best estimates, fields Tupi (2006), Jupiter (2008), Franco (2010), Lara (2008), Jubarte (2001), Mexilhao (2001) and the newly discovered Libra deposit (2010), could contain up to 40 billion barrels of oil equivalent - about half the size of Saudi's elephant Ghawar Field. That may sound like a bit of a stretch and, to be fair, many of these discoveries are relatively fresh and estimates can vary quite a bit on the size of the deposits. Moreover, governments with total or majority control over their national reserves tend, as governments do, to err on the side of optimism when evaluating the size of their own fields. But that's probably as true for Saudi and Russia, say, as it is for Brazil and the West African nations. Overestimating the size of one's endowment is nothing new, after all. Nevertheless, even if only one third of Brazil's recently discovered deepwater deposits end up in the "recoverable" basket, that still puts the total reserves more or less on par with Alaska's Prudhoe Bay giant...a field discovered more than four decades ago which is laboring under an 11% annual decline rate. And the South American field leader is showing no signs of slowing down, either. Given its recent spate of discoveries, it should come as little surprise that Brazil is doubling down on its deepwater bet, a tactic seen in sharper relief when compared to the post BP blowout response by the US. "The Department of Interior (DOI) is pretty much squashing offshore development in the name of safety," Byron King, our resident oil man noted in yesterday's 5-Minute Forecast. "'No more blowouts' is a nice slogan, but it seems that the DOI wants to achieve that worthy goal by just shutting down offshore development for all purposes. "Since June," continued Byron, "the DOI has approved less than one new offshore drilling permit per week - and only in shallow waters, less than 500 feet depth. Almost NONE of the permits are for exploration wells, with the few approvals being for developmental drilling in known areas. "It's a recipe for falling future output and eventual energy shortages in the US," concluded Byron, to which 5 editor Dave Gonigam astutely added, "And it stands in stark contrast to what other governments are doing." Indeed. Already South America's largest economy, Brazil hopes to increase its deepwater production from 1.4 million barrels per day, as measured in 2009, to 3.5 million by 2020. Deepwater production in the US, by comparison, looks set to remain stable at 1.2 million barrels per day...after having only increased from 1 million barrels per day since 2000. Elsewhere, too, nations unable to afford the luxury of environmental hysteria are taking advantage of the political fallout in the US to advance their own deepwater programs. Where the Gulf of Mexico remains paralyzed, the Gulf of Guinea, for example, flourishes with exploration activity. Reports The Wall Street Journal: "Tullow [Oil PLC] in July announced a significant discovery off Ghana after drilling in 4,685 feet of water. A nearby field, estimated to contain up to 1.5 billion barrels of oil, is scheduled for first production in December. "Chevron, meanwhile, announced the acquisition of three large deep- water exploration blocks in Liberia. It plans to begin drilling there this year. The company also bought deep-water acreage in the Turkish Black Sea and in China." With the BP disaster still fresh in the minds of many Americans, the Obama administration has obviously decided it cannot afford the political cost of more deepwater drilling. The Brazilians and West Africans, however, seem to have decided they cannot afford not to drill. All this bodes very well for of one of Byron's favorite small-cap oil plays, just one of four companies he identifies in his latest research report. In it, Byron also identifies two tiny uranium miners and one firm sitting on an $883 million gold mine. Byron reveals the details in this presentation. It will be only online until midnight tonight...or until all 500 reports are gone. As of this morning, there were about 125 or so left. Just a heads up. The New OIL WAR and Why Iran Threatens Your Money... According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue. Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead... Click here to watch Byron's value-packed presentation now. The Daily Reckoning Presents The Wonderful World of Charles Fabrikant Chris Mayer A little nugget every investor learns eventually: Talented people create wealth. And talent is an asset that never really goes into a bear market. It's always valuable...as the long-term investment performance of SEACOR Holdings (NYSE:CKH, $104.30) demonstrates very clearly. A couple of months ago, when CKH was trading in the mid-$80s, I recommended the stock to the subscribers of Capital & Crisis. My reasoning was very simple: SEACOR Holdings is a great company that's run by a very talented investor...and its stock was quite cheap. The stock isn't as cheap anymore (it is up about 45% since my recommendation, after taking into account the special $15 dividend), but SEACOR is still a great company that's still run by a very talented investor. His name is Charles Fabrikant and he has compounded capital at a 15% clip since 1992. The S&P 500, by contrast, has delivered 5.6%. He also pens as good as an annual letter as one will find on either side of the Mississippi. But let's start at the beginning, about 20 years ago. Fabrikant was one of a group of investors looking to buy a shipping business. They took over NICOR Marine and adopted the name SEACOR "primarily because it was less costly to paint over two letters than the entire name," Fabrikant writes. SEACOR soon spread into a variety of businesses out of "a conviction that if opportunity knocks, we should open the door." Today SEACOR owns and operates barges, tankers, work boats and helicopters. About half of the business is the legacy offshore marine services business. This division mainly serves the offshore oil and gas industry. The other businesses do all kinds of things. SEACOR's helicopters work in oil and gas, medical emergencies, firefighting and much more. Its cargo ships support US inland waterways. Its boats also work in environmental cleanups, such as the mess in the Gulf of Mexico. These are a few of SEACOR's profitable hobbies. What SEACOR really is, though, is an opportunistic asset manager. Fabrikant says SEACOR "is not just a boat company or an energy service company. Our asset base is diverse and our horizon is broader than simply owning and operating equipment. We are a custodian of capital, and our mission is to use our expertise and knowledge to make money." In short, SEACOR is a "go anywhere" investor. Just in the last handful of years, SEACOR has established ventures in Argentina to operate barges and ships, in Brazil to operate helicopters and in China to sell business jets and helicopters. Fabrikant is also adamant about having a diverse collection of businesses. "I realize that some investors may not like mixed drinks," he writes, "but this philosophy of diversity is core to our business strategy." It's served SEACOR well. It has never - not even once - reported a loss for any year in its history. Fabrikant also lays out many wise nuggets in his letters. I wish more corporate executives thought like he does - and were also owners of the enterprises they manage. "Capital, like assets, needs to be deployed and priced to replacement cost." Fabrikant deals in tangible assets and thinks in terms of "replacement cost." This kind of analysis asks, "What does it cost to build an asset from scratch?" By this way of thinking, an asset is cheap only if you can buy it for less than you can build it. A man who thinks this way will not lose money over his career. And so Fabrikant does not automatically employ SEACOR's cash flow toward new boats, helicopters and the like. In recent years, he's bought back a lot of stock. This year alone, SEACOR bought back 1.6 million shares at about $74 per share. Since 2007, he's retired 18% of the shares. When SEACOR's stock price is below book, Fabrikant is a buyer. "We manage for long-term appreciation in book value, not year-to-year earnings." I love it. Fabrikant doesn't play to Wall Street. It's probably why only one analyst - from Barclays - covers the stock. As long as you can buy the stock below book value, I think you're getting a good deal. Current book value is $90 per share. That book value is firm. SEACOR depreciates its assets more quickly than industry peers. SEACOR has also demonstrated an ability to sell assets for more than book value. And anyway, as long as Fabrikant can continue to do what he has done since 1992 - which is compound book value at a 15% clip - then this should prove a nice long-term investment. You can play around with numbers and see how this might look in three years. If book value continues to compound at 15% a year for the next three years, then book value per share will be $137. Even a modest 20% premium to book would take the stock to $165 per share. Importantly, the executives and directors own 9% of the company. Fabrikant is the largest shareholder among these, with 5%. So his interests are aligned directly with the common shareholder. Everyone's portfolio should have some room for a steady grinder like SEACOR. You can't own only the rabbits. Well, you could, but you'd need a lot of antacid. SEACOR is a sleep-well-at-night investment. Regards, Chris Mayer, for The Daily Reckoning Bill Bonner Debt at Every Turn: New Governors Attack the Debt Crisis Bill Bonner Reckoning from Liberia, Costa Rica... "The Day of Reckoning has come!" So said New Jersey's new governor-elect. New Jersey is hardly unique. Practically every government in the developed world faces the same problem. National. State. Local. Expenses grew during the boom years. We all know why. Politicians prefer to spend then to save. They buy votes with other people's money. That's why they like programs for poor people. They come cheap. But the votes they buy on credit are even cheaper. Give a job...a handout...free drugs...housing subsidies - and send the bill to the next generation. With declining interest rates and an expanding economy, governments could get away with it. Low interest rates made deficits easy to finance and reduced the cost of refinancing existing debt too. The trend was always unsustainable, even when things were going well. You can't spend more than you can afford forever. Everyone knew that a day of reckoning would come. And guess what...here it is. These new governors are no dopes. They have some room to maneuver. They can blame the problems on their predecessors. They can be heroes, solving them. In cutting spending now, they'll be doing what has to be done. The smart thing to do would be to exaggerate the problems. But in the present case, exaggeration is hardly necessary. The financial problems are so grave, they don't need to be puffed up. Newly-elected governor Jerry Brown in the Golden State is in the same position. Hardly had the votes been counted when Jerry began taking more careful inventory. Naturally, what he found surprised him... He was shocked...SHOCKED...by the seriousness of the fiscal challenge. He pledged to come into the state capital with a broom the size of the Inland Empire...sweeping away unnecessary expenses and cleaning up state finances. The story is the same in practically every Middlesex, village and farm community. States and municipalities spent more than they could afford. They ran up pension obligations. They borrowed for stadia and swimming pools. And now, like Ireland and Greece, they can't keep up with the payments. What are they to do? Default! Yes, but before they do that they need to make a show of trying to be responsible. They need to talk about budget cutting and financial integrity. They will try to cut wages, close libraries, and renegotiate contracts. Some will succeed. Many won't. All we know for sure is that it will be fun to watch. We also know that people who lent money to these governments will wish they hadn't. In the US, as in Europe, there are bound to be debt crises. Cities and states will come to the brink of insolvency. There will be bailout initiatives. Austerity drives. Showdowns with unions. New York City almost went broke in the '70s. The mayor asked the federal government for a bailout. "Drop dead," said President Jerry Ford...or at least that was what was reported in the New York tabloids. The feds said no. New York had to get its own house in order. Of course, it succeeded, thanks in part to a huge boom in the financial industry that began in 1982. Will there be another huge boom in the US? Maybe. But there's a bust to live through first. And in the crises ahead, municipal bonds are almost sure to go down. Beware. And more thoughts... Mr. Ben Bernanke. Mythbuster! "One myth that's out there," he told 60 Minutes, "is that what we're doing is printing money." Ha. Ha. Ha. Can you imagine anything so laughable? So ridiculous? So absurd? And to think that even we, at The Daily Reckoning, believed it. How could we be so credulous? Of course, the Fed is not printing up money. How could we have been so naïve? The days of printing up money are long gone. Now, the Fed doesn't do anything of the sort. Instead, it merely buys US government debt from banks. That's not printing money. Nope. Not at all. Not even close. But wait. How does it pay for the bills, notes and bonds it buys? Oh, well, it certainly doesn't print up money. Instead, it merely credits the banks with the money...electronically. No printing involved. The banks then have money that didn't exist before. The banks are supposed to lend it out. For every dollar they get from the Fed they can lend out 10. That's how it works. So, IF anyone wanted to borrow the money, and IF the Fed had bought, say, $1 trillion worth of US government debt, the banks COULD lend ten times that amount...thus increasing the supply of money in circulation by $10 trillion. Does that sound like printing money to you? Nah... Of course not. Does it sound like it might cause inflation? Well, yes... It would be rather surprising if it didn't. Consumer price inflation is now running at about 1% per year. Why so low? Because, so far, the banks aren't lending. The Fed adds money to the system. But it doesn't get passed along. Why not? Because we're in a Great Correction. The economy is saturated with debt. People are trying to dry out. And no matter how many times the Fed offers them a drink; they're still on the wagon. Of course, if the economy were to go on a binge again, the banks would lend, people would borrow, and all that money the Fed didn't print would suddenly come out of hiding. Consumer prices would go up. Hyperinflation could come quickly. Then what would Mr. Bernanke do? He says he would raise interest rates immediately, should the CPI hit 2%. Well, dear reader, do you believe him? We do. At least as much as we believe he's not printing money. Regards, Bill Bonner for The Daily Reckoning