Great Problems and Great Fortunes

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"Peak oil, my a**! I've got hundreds of millions of barrels of the stuff in the Gulf [of Mexico]. We know where the oil is, we just can't get to it. . ."

"Peak oil, my a**! I've got hundreds of millions of barrels of the stuff in the Gulf [of Mexico]. We know where the oil is, we just can't get to it. I can't even get a contractor that can do the work to take my call."

That's what an oil company executive told me (with a Texas drawl and an arm around my shoulder for balance) a little over three years ago.

At the time oil was $60. There was no telling how high it could go. The aged scotch was flowing in celebration of good times - and even better times to come.

The conference was in New York City, but a few hundred oilmen from across the country came to celebrate, swap stories, and complain. About 9 out of 10 people in the room were wearing a three-piece suit and cowboy boot combination. Your editor was just another face in the crowd. But I was a face with a lot of questions and looking for a lot of answers.

It was a good time. More importantly, it was a good place to start. I wasn't going to jump in and start buying away after a single man's certainly somewhat exaggerated tale. But he had an idea and one which made sense. So I delved a bit deeper.

It turns out our new friend wasn't the only person having problems tapping into his deep sea oil. Practically every oil company was. The deep sea oil service sector was backed up for years. Some companies had crews and equipment booked through 2011 (this was 2006) .

"Clearly there are some big problems, but who had the solution? That's where I want to have my money," I thought.

It turns out not too many companies did have a solution. There are four companies which made up 87% of the deep sea oil service market. It's a small club and the companies in it had huge "moats."

The industry was doing exceptionally well, too. The proof was the in the margins. Operating margins, one of the best indicator's of a company's true health, were steadily growing wider. Basically, these companies were getting more profit for every new dollar in sales. When sales are growing at a 30% clip, you can bet earnings are growing even faster.

We see great companies all the time, though. Not all of them are great stocks to own. Acergy (NASDAQ:ACGY), one of the four in the club, was underpriced considering it was booked out for years and steady profit growth was pretty much assured by customers like ExxonMobil and BP willing to pay any price for its services. This was a great company and great stock.

It returned a 150% in the next year and a half or so. Now, the situation has changed quite a bit. A few years, hundreds of billions of dollars in capital investment, and economic downturn have relieved a lot of the problems faced by the oil industry.

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