Thoughts from our Domestic Equity Team
Equity markets have surged this year, led by mostly defensive sectors such as Healthcare, Utilities and Consumer Staples. Notably absent has been the Technology sector, although in recent days there has been some improved performance. Many explanations have been cited as the reason for tech’s lackluster performance, such as the lack of any new “gee-whiz” consumer product, very modest industrial and commercial enterprise growth reducing the need for major tech spending, and of course the seemingly inevitable decline of computing power cost. Moore’s Law, which predicts the doubling of computing speed every 18 months is alive and well, but what might be called “Bell’s Law”, the incredible growth of mobile capabilities, seems to have eclipsed other forms of technology, further driving down the cost curve. There is at least one industry however, Energy, which is experiencing rapid growth, spurred on by the use of technology, a fact not well understood in non-energy circles.
The United States is seemingly on the verge of an industrial renaissance aided in large part by the technological advances across virtually all aspects of the Energy industry. Among many factors, horizontal drilling (HZ) is transforming an industry that had not changed much since John D. Rockefeller and Colonel Drake started drilling in western Pennsylvania in the 19th century. While hydraulic fracturing has been employed for over 60 years, in combination with HZ and high pressure power it is now achieving remarkable results in unconventional shale formations. Refineries have been reconfigured to process ever changing crude oil varieties, as lighter shale crudes displace heavier imported types. And the ability to conduct very sophisticated seismic surveys over land and water and, perhaps most importantly, process that data in ways and at low cost never before seen has resulted in exponential gains in understanding the earth’s geology.
While the number of oil and gas wells drilled in the U.S. has stayed about the same in the post-WWII period, the percentage of dry holes has plummeted to about 11% from over 33%, reflecting developmental drilling success and enormous advances in seismic interpretations. 2D geophysical surveying morphed into 3D and now the ability to reprocess 3D data and utilize wide and rich azimuth seismic techniques (a method of increasing clarity via geometric means) through computing power, speed, new algorithms and incredibly lower cost are illuminating geological formations that were previously hidden. In the early 1960s, the cost to process one gigaflop (billion operations) of seismic data was said to be in the trillions of dollars, and today it is in the 50 cent area. Thus, technology is the foundation of the new energy renaissance in this country, and perhaps ironically it is that very success that has placed investor bets on sectors such as those encompassed in our “Energy Arbitrage” theme and away from traditional technology participants. In our view, as the power of these and other technological productivity enhancements continues to create opportunities not yet well understood, a renewed appreciation by investors of the tech sector’s many benefits is likely to return.
Submitted by: Robert L. Meyer - Managing Director and Portfolio Manager
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