Capital market veterans will surely remember the oil craze of the early '90s. Isramco tried its luck off the coast of Ashdod, and set investors' imaginations alight with fantasies of oil discoveries. The "Yam 2" drilling was splashed over the front pages of newspapers, adding fuel to the fire. Some investors even went so far as to equip themselves with boats and binoculars, and tried to sail as close as possible to the drilling platform. Every accidental burst of flame set the stock alight, raising the speculative heat. It ended as every hysteria ends, with traces of oil, and an almighty collapse of the participation units in Isramco.
I remember, too, quite a trauma: the phone call I received after another attempt by "Globes" to cool the overheated atmosphere and warn of the bubble that was developing. An angry investor blasted my ears and rained down curses on me, promising me to pray on Friday night and "recommend" to the Creator to raise me to heaven. The "Globes" reporter who at the time covered Isramco with healthy skepticism received threats on her life, and for a time went around with a bodyguard.
I write this introduction because, when I see the current giddy enthusiasm for oil and gas stocks, I have a sense of déjà vu from the gay days of the early '90s. Despite the distance in time, the gaps in technology and in the way information is disseminated on the capital market, history always repeats itself, even if in a slightly different and more sophisticated way. It's the same speculative frenzy, the same enthusiasm at signs of oil or an oil gush, the same kind of herd thinking, the same high trading volumes in the relevant stocks, the same over-excited and irresponsible reports about Israel as an emerging energy superpower, the same small investors falling upon the shares indiscriminately, the same aggressive responses to any attempt to put things in perspective, and thousands of comments and talkbacks on forums dealing with oil and gas stocks. In short, it's a party, just join in.
Fully priced
Today's story is indeed different. There really is a significant gas discovery (Tamar and Dalit) worth a little over $6 billion. There really are reasonable explanations for the meteoric rises in some of the shares. It seems that there really is a high chance of finding more gas. But from here to extrapolating from gas to oil, to an indiscriminate, reckless boom in anything that smells of either, in anything with a drilling and exploration license, is long, long way over the top.
I hope that all the drillings will be productive, that we really will turn into a land flowing with milk, honey, oil, and gas, but I feel that I must point out, as things reach boiling point, that a dangerous bubble is developing here, and that the hysteria in the sector reflects an unhealthy level of speculation.
I recommend to investors that they should carefully peruse the research of investment house IBI released last week, which matches my feelings. In essence, even the healthy shares in the sector, which have holdings in the Tamar discovery (Isramco, Avner, Delek Energy, and Delek Drilling), are apparently fully priced and probably more. The full pricing fails to take into account that gas will start flowing from the discovery only in another three years, that there still remain unanswered questions about the heavy development cost and how it will be financed, about the rate of production, and the price of the gas.
Besides, these reservoirs are supposed to provide for the needs of the local market for many years, something like 20-25 years, so the market can not absorb additional quantities of gas, if there are any, in the further drillings. The option of selling gas to foreign markets seems at this point unprofitable.
History will repeat itself
In other oil stocks, speculation is galloping ahead, riding the success of Tamar and Dalit. Givot (oil), Ratio (gas near Tamar), Modiin, Sadot, Lapidot, Zerah, and others, have soared skywards without them finding a drop of gas or oil, just because they have smelled one or the other, or just because some of them have applied for drilling licenses and then run to tell the media in order to boost the share price. Ratio's drilling permit, for example, gives it a market cap of NIS 4-5 billion, even before the discovery of any reservoir.
As I said, history repeats itself on the markets, and any bubble, whether in oil shares, biomed, Internet, or real estate, in the end obeys historical laws, starting with a boom, with euphoria and unbounded greed, and ending with general collapse. Every bubble is formed out of wild speculation, from the pursuit of dream stocks, and from unbridled behavior arising from the fatal combination of a lot of cheap money and too little common sense. Unfortunately, I feel that the current bubble of oil and gas stocks will end the same unpleasant way.
If I'm proved wrong, and I hope I am and that we do become an energy power, I will at least be glad to discover that the rain of curses I will yet receive for this column was completely justified.
Published by Globes [online], Israel business news - www.globes-online.com - on January 24, 2010
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