Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Investing in the abyss: Profit opportunities in the post peak era,
• Jacking-up your portfolio with offshore riches,
• The Reserve: Remaining Positions…and plenty more Rude thoughts…

Eric Fry, reporting from command central: Baltimore, Maryland…

In a recent edition of the Rude Awakening, Dan Amoss, editor of Strategic Investment,
discussed the future of offshore oil extraction. “The world gets about one-third of its
daily oil supply from offshore wells,” Dan remarked, “And over the next decade, this
share should grow even larger.”

To support his forecast, Dan cited the research of Dr. Michael Smith, CEO of
EnergyFiles Ltd. Dr. Smith predicts offshore production will surge between now and
2015 – a forecast which would bestow ample opportunities upon the companies that
facilitate offshore exploration and development activities. In fact, National Oilwell Varco
Inc., have just agreed to buy one of the companies Dan recommended in last week’s
Rude column, Grant Prideco Inc., in a deal valued at about $7.2 billion.

In the column below, Byron King, editor of Outstanding Investments, takes a peak under
the hatch of the “subsea processing” industry.

The subsea environment, like James Dean, is dark, deep and inscrutable. But that’s not
what makes subsea processing so sexy. Rather, surging demand and a long-term growth
profile are its most alluring qualities. Read on for the scintillating details…

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The Navy has already collected $194 million from this discovery.

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nearly four-fold over the last two years, to about $100 million last year… Because it’s
[still] so small, there’s large growth potential here…’ Learn More Here.

——————————————————————-

Extraction Fashion
By Byron King

“Subsea processing” is the new black – the sexiest fashion in the world of oil extraction.
Based on figures put out by the International Energy Agency (IEA), “nontraditional”
methods will play a large role in replacing future oil production. And many of those non-
traditional methods will operate more than 1,000 feet below the surface of the ocean.
Take a look at the chart below, which is based upon International Energy Agency
statistics and forecasts.

The world’s known oil reserves are depleting inexorably. Most major oil-producing
regions of the world are at or near the stage called “irreversible decline.” Conventional,
onshore production is leading the decline, which means that non-conventional production
will become increasingly…well…conventional.

New methods and technologies for recovering oil, which are generally called enhanced
oil recovery (EOR) methods, are also being applied with great potential. And other
hydrocarbon resources, such as the tar sands of Alberta or the heavy oil of Venezuela, are
also coming online, but in volumes that are marginal at best in terms of daily worldwide
demand. Finally, there are the prospects for new discoveries in frontier areas such as the
Arctic. And then there’s offshore…deep offshore.

Let’s take a look at the future of offshore production, and particularly at production in
areas known as “deepwater.” Offshore oil exploration and development as we know and
understand it today dates back to the 1940s. Back then, people used land-based
technology and began a systematic process of applying it to the offshore environment.
But “deepwater” wells, meaning depths greater than about 1,500 feet, are a very recent
phenomenon. As recently as the early 1990s, there were almost no wells in more than
1,000 feet of water, not even among the large-scale projects in the Gulf of Mexico
(GOM) or the North Sea. Anything deeper than 1,000 feet that was considered a
technological frontier.

Within the past 15 years or so, deepwater has evolved from being a technological frontier
to a strategically important component of the world’s oil industry. But the deepwater and
ultra-deepwater regions of the world are still underexplored and hold considerable
potential. Significant deepwater locations include the GOM, the Arctic regions, offshore
West Africa, offshore North Africa, offshore South America, the South China Sea and the
margins of the Indian Ocean.

In fact, deepwater is driving significant growth in offshore activities, with at least $20
billion already budgeted to develop identified projects between 2006-2010. While the
deepwater effort is moving to remote sites, often far offshore, the existing fields that are
closer to shore still require significant capital investment to boost production via new
drilling, re-drilling old wells, drilling offset wells and installing and applying other forms
of production enhancements.

From the exploration standpoint, deepwater fields tend to be few, but in terms of
discovery and exploitation, they are extremely productive. In the deepwater trends of the
GOM, for example, there are deeply buried turbidite sands that have yielded in excess of
20,000 barrels of oil per day. Hence, these are key targets for the drillers’ bits, and the
potential payoff both invites and requires significant capital investment.

But offshore and deepwater development does not end with the massive drillships that
grind the initial holes in the bottom of the sea. In fact, drilling is just the beginning of a
long, costly process called subsea processing. This activity includes making the oil and
gas flow from the deeply buried rock formations, dealing with issues of pressure
maintenance and handling the byproducts such as sand and deep brine water that come up with the oil and gas.

Take the high-pressure, high-temperature regime of deep wells in general and now put
these problems many thousands of feet below the surface of the sea. The problems are
compounded, literally, by orders of magnitude. After dealing with the “production”
issues, another requirement is either to bring the oil and gas to the surface of the sea for
transport ashore or to pump it via pipeline to some landfall. The traditional offshore
methods for doing this used massive platforms that were anchored to the seabed. But in
deepwater environments, this is all but impossible. So we have to consider that it will be
necessary to expand the subsea franchise. That is, much of what occurs in the future will
have to occur at depth, far offshore and deep beneath the waves.

The subsea market is very much on an upward growth path, particularly when looking at
the value of delivered systems between 2001-mid-2007 and forecasting deliveries of
orders on the books out to 2011. Subsea production is currently occurring in 50 countries
worldwide, with a further 10 nations to join this club within the next few years.
Who are the players in all of this? Here is a chart of the principal leaders among the
companies that design, build and deliver significant subsea production systems.

The leading U.S.-traded companies in the subsea field that are stand-alone investment
plays are FMC Technologies Inc. (FTI), Cameron Intl. (CAM) and Dril-Quip (DRQ).
Another highly regarded company in the field, Vetco Gray, was acquired earlier this year
by General Electric (GE: NYSE).

One more company that is a player in the subsea equipment business is Aker Kvaerner,
which trades on the Oslo, Norway, exchange. (The stock also trades here in the U.S.
over-the-counter market under the symbol AKKVF). Aker cut its teeth developing
technology for work in the North Sea, and thus is a world leader in the field. Looking
forward, half of all semisubmersible drilling rigs in the world currently under
construction will be equipped with equipment supplied by Aker.

In the subsea realm, the current market fundamentals are extremely healthy for
contractors. Profit margins are large and growing. The supply chain for the offshore
sector is close to or at full capacity, which leads to a seller’s market in equipment and
services. There are severe constraints in fabrication facilities, manpower, equipment and
material availability, leading to cost-inflation overall. Any operator that is planning an
offshore project, and certainly a deepwater project, needs to order critical equipment
early and keep the time between discovery and production as short as possible.

In the subsea equipment field, the trend is for operators to develop long-term
relationships with the suppliers named in this report. These relationships will almost
certainly last for at least 15-20 years per project. Due to the unique conditions of each
deepwater project, not every contractor possesses the abilities necessary to bid on every
job, and the proverbial “low-cost bidder” is not necessarily the one being chosen.

As conventional oil production continues to decline, investment dollars will continue to
flow toward offshore production, particularly deepwater.

Get with the fashion…while it’s still avante-garde.

[Joel's Note: As the dynamics in the volatile world of energy investing shift, so to do the
investment opportunities therein. Keeping abreast of all the activity in the energy
complex takes extensive research, but the rewards can be very handsome. That’s why we
bring research to you from guys like Dan and Byron. They troll the globe (including the
ocean floors) to bring you the investment themes and opportunities of tomorrow…today.

Last month we launched Byron’s brand new research service, the Energy & Scarticy
Investor. Next month we’ll be launching another service by Dan Amoss, the Strategic
Short Report. To be fair, these services are not cheap. In fact, you’d pay about two and a
half grand for the both of them if you bought each separately.

The easiest (and least expensive) way to avail yourself to all this research is to become a
member of the Agora Financial Reserve – the lifetime membership package of all
Agora’s services Basically, you pay a one-time fee and are guaranteed all of our best
research for the rest of your life. If you’re not a Reserve member, but would like to know
how you can secure yourself a seat, here’s a link to all you need to know to get started.
Agora Financial Reserve – Doors Open until Jan. 1

Cheers,

Joel Bowman

P.S. Existing Agora Financial subscribers will also be eligible for further
Reserve Membership discount. Calculate your net cost/benefit here: The Reserve -
Existing Agora Financial Member.