Profit from a stupid energy policy

Years from reality

Getting to a cellulose-based biofuels industry that can provide billions of gallons of competitively priced fuel to the transportation market is at least five years away, most in the field agree. Others say the schedule is more like 10 years. The technology needs to be improved to bring costs down to something like the $1.50 a gallon that corn-based ethanol costs to produce. And the industry will have to solve the problem of how to collect enough bulky biomass from sources such as forests and grasslands to feed a processing plant.

If you accept that the United States faces real problems -- whether you see those as global climate change, a threat to national security from a dependence on imported oil or simply painfully high prices of heating oil and gasoline -- then a national energy policy of delay may strike you as insane.

But delay does create winners in these two segments of the energy industry:

Winner No. 1

Delay means the United States will continue to consume an increasing amount of oil every year. That will help keep global supply tight in 2008 and, Wall Street analysts project, keep oil prices above $80 a barrel, on average, this year. Oil prices averaged around $74 a barrel in 2007.

With $80 oil, 2008 will see big increases in capital budgets from the international oil majors and from the state-owned oil companies that now control about 80% of global oil reserves. In December, Lehman Bros. (LEH, news, msgs) projected that the global oil industry's capital spending would climb by 11% this year, with the bulk of the increase coming outside North America. That extends the boom times for drillers and oil-service companies for at least another year and makes them a major winner from a U.S. energy policy of delay.

My three picks in this sector for 2008 are FMC Technologies (FTI, news, msgs), Weatherford International (WFT, news, msgs) and Oceaneering International (OII, news, msgs):

• FMC Technologies is in the process of spinning off its food-technology and airport-systems businesses to shareholders by mid-2008. What will remain is a tightly focused energy company with a 40% to 45% share of the market for subsea systems that control the flow of oil and gas from ocean floors to floating production facilities, fixed platforms or onshore storage systems. The company's expertise in oil production at depths of more than 1,000 feet assures FMC a big share of the hottest trend in new oil production.

• Weatherford International has gone hard after new business in the Caspian Sea basin, the Middle East and North Africa. As a result, sales outside North America climbed to 44% of total revenue in 2006 and to 50% of revenue in the third quarter of 2007.

• Oceaneering International specializes in deep-water and ultradeep-water equipment, including remotely operated vehicles (31% of revenue) and the connections needed to complete subsea drilling operations. The company has a dominant position on the 74 deep- and ultradeep-water rigs in operation, and with 65 more of the rigs scheduled for delivery from now through 2011, it is looking at a major expansion of its market opportunities. Day rates for remotely operated vehicles continued to climb in 2007 -- they rose 15% in the third quarter from the same period in 2006 -- and the 11% increase in oil industry capital spending forecast for 2008 should keep rates climbing.

Winner No. 2

The high price of oil makes replacing oil with coal an economic no-brainer. Environmentally, coal is a big problem, since producing a ton of oil from coal requires the use of five to 18 tons of water and releases seven to 10 times as much carbon dioxide as does refining oil.

But the U.S. energy policy of delay has left a big window open. The possibility that a future global agreement on climate change would restrict building of new coal-fired power plants or new coal-to-oil facilities has unleashed a rush to build, especially in Asia.

China Shenhua Energy (CUAEF, news, msgs) will start China's first large-scale coal-to-oil plant in 2008 with an initial output of 20,000 barrels a day. By 2030, the International Energy Agency projects, China will produce 750,000 barrels a day from coal. India is getting in on the act, too, with talks under way about setting up the country's first plant.

Continued: 2 sector picks and more

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