Why the Oil Market Favors the Deepwater Subsector

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"There's a reason big oil companies are increasingly state-owned. . ."

Depletion is one of the most important subjects for anybody interested in the oil industry. Easy oil of the light, sweet crude variety is getting scarcer by the month. The steady disappearance of existing deposits forces oil companies to set their sights farther afield in search of replacing the oil volume lost to depletion. Annually, world oil supply is losing about 4 million barrels per day to depletion.

Where do you go to make up for that if you're, say, ExxonMobil (XOM)? Not to Texas or Alaska anymore, there are no more Ghawars, and the Canadian oil sands are a very expensive way to get more supply.

Then, there's the issue of resource nationalism. There's a reason big oil companies are increasingly state-owned, as in China's Sinopec or Russia's Gazprom: countries don't want to leave something as precious as the world's last oil deposits to the whims of free enterprise.

Another problem with the majors is that they're already so big and new volume is getting so hard to find, that meaningful growth may be hard to create. Just maintaining solid operations with existing supply as prices inevitably soar will help. Also, as oil prices rise over the long term, operations such as the Canadian oil sands should become financially viable, and new technologies may make them viable energy-wise as well.

Yet, we continue to think the best way to benefit from the long-term oil market remains the equipment companies, such as deepwater shops and firms working on the technologies to make hard-access sources viable. The beauty of such firms is that they'll do well regardless of whether their products and services are bought by majors or NOCs or, more likely, both.

The majors and the NOCs are spending their own capital to develop or acquire technologies they think will be critical in the future. Part of our analysis centers on weighing which companies are gaining an advantage. So far, the deepwater shops look to hold the best position for the medium term.

The trends are clear and give you an important to-do: watch the deepwater subsector of the oil industry.

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