Reserves Rise Rapidly…

I have writtent about reserve replacement ratio figures before (i.e. here). It has become part of the accepted meme in offshore for why there must be a recovery. The above IEA data just released categorically shows this isn’t really an issue at the moment and there are now numerous data points that for large companies in particular investors are happy for the reserves figures to drop below historical averages.


I am writing a longer piece on momentum, herding, and the jack-up market where I think people are getting a little carried away. I note that this isn’t unique to the oil and gas segment with the FT having a good article on Norwegian this weekend. Like some jack-up companies today Norwegian took an outsized bet on a market coming about (low cost international with a new business model), unfortunately for them it just hasn’t. Norwegian benefited from aircraft manufacturers wanting to sell planes that allowed them to embed huge amounts of leverage in their financial structure that would not be possible in a “normal” market. As the Bernstein analyst says:

“If you’re a holder, you need to sell. If you can short the stock, short the stock.” A second analyst, who did not want to be named, is blunter: Norwegian could “go bust in the autumn”.

Stock markets are known to be irrational, momentum strategies in particular are known to exist at certain points in time but to be transitory in  nature. Norwegian serves as a warning to anyone following exactly the same strategy in oil and gas.

However, nothing excites markets more than forecasts of markets doubling in five years (a magical number in  finance which equates to a 15% compaound annual growth rate over five years (1.15^5*)) forgetting that earnings discounted that far out at a discount rate that reflects the risk could easily absorb any rational return calculations.

But back to my point here: if reserves are your argument for increased offshore activity I think you need a new one.

*Number updated for a typo in the original version.

2 thoughts on “Reserves Rise Rapidly…

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