Just saw the following comments from the 2nd quarter share holder letter of OAKBX, I am wondering what is your take on the opinion here(http://www.oakmark.com/opencommentary.asp?commentary_id=578&news_from=c&fund_id=0)
[quote]
Over the past five years natural gas needed to trade at $6 - $7 per mmbtu to encourage new production of natural gas. Lower prices tended to cause a reduction in drilling and production to slow accordingly, resulting ultimately in a supply-demand imbalance that would increase prices until the demand was met again. In the past twelve months, prices have remained under $5 per mmbtu with the expectation that production would again be shut-in and drilling curtailed until pricing corrected back towards the $7 mmbtu range. The problem with these assumptions is that many companies have improved their horizontal drilling techniques to a point where they can earn attractive returns with gas at much lower prices than had been the case even a few years ago. As this technique becomes increasingly adopted by more companies, we are concerned that horizontal drilling will become a truly disruptive technology, resulting in lower price highs for natural gas. The prices at which producers will continue to expand production now appear to be in flux and drifting lower towards a new clearing price. Horizontally drilled wells may actually only generate negative cash flow when gas prices fall to $3 per mmbtu for the most efficient producers. Higher cost wells can be shut without ending oversupply because of the greater efficiency of horizontally drilled wells. Each horizontal rig can surge production by 5-10x the previous capability of vertically drilled wells. Thus, companies can adjust supply to meet demand in a much shorter time frame than the months historically required to correct imbalances. Thus, for the foreseeable future we expect natural gas prices to remain under $5.50 per mmbtu. Capacity should come off line as prices go below $3.50.
[/quote]
PS: OAKBX performance compared with VTSMX, VBMFX for the past 15 years:
http://quote.morningstar.com/fund/chart.aspx?t=OAKBX®ion=USA&culture=en-US&statePara=%7Bsecurities%3A%5B%7Bn%3A%22Oakmark%20Equity%20%26%20Income%20I%22%2Cids%3A%22FOUSA00EA6%7C0P00002RHQ%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1995-10-31%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Vanguard%20Total%20Bond%20Market%20Index%22%2Cids%3A%22FOUSA00FQH%7C0P00002SXS%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1986-12-11%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Vanguard%20Total%20Stock%20Mkt%20Idx%22%2Cids%3A%22FOUSA00FQU%7C0P00002SY4%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1992-4-27%7C%7C%7Cfalse%7CUSA%7C19%22%7D%5D%2CchartType%3A%22GrowthChart%22%2Crange%3A%221995-11-1%7C2010-7-19%22%2Cperiod%3A10%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%22%22%2Csma%3A%220%2C0%2C0%22%7D
[quote]
Over the past five years natural gas needed to trade at $6 - $7 per mmbtu to encourage new production of natural gas. Lower prices tended to cause a reduction in drilling and production to slow accordingly, resulting ultimately in a supply-demand imbalance that would increase prices until the demand was met again. In the past twelve months, prices have remained under $5 per mmbtu with the expectation that production would again be shut-in and drilling curtailed until pricing corrected back towards the $7 mmbtu range. The problem with these assumptions is that many companies have improved their horizontal drilling techniques to a point where they can earn attractive returns with gas at much lower prices than had been the case even a few years ago. As this technique becomes increasingly adopted by more companies, we are concerned that horizontal drilling will become a truly disruptive technology, resulting in lower price highs for natural gas. The prices at which producers will continue to expand production now appear to be in flux and drifting lower towards a new clearing price. Horizontally drilled wells may actually only generate negative cash flow when gas prices fall to $3 per mmbtu for the most efficient producers. Higher cost wells can be shut without ending oversupply because of the greater efficiency of horizontally drilled wells. Each horizontal rig can surge production by 5-10x the previous capability of vertically drilled wells. Thus, companies can adjust supply to meet demand in a much shorter time frame than the months historically required to correct imbalances. Thus, for the foreseeable future we expect natural gas prices to remain under $5.50 per mmbtu. Capacity should come off line as prices go below $3.50.
[/quote]
PS: OAKBX performance compared with VTSMX, VBMFX for the past 15 years:
http://quote.morningstar.com/fund/chart.aspx?t=OAKBX®ion=USA&culture=en-US&statePara=%7Bsecurities%3A%5B%7Bn%3A%22Oakmark%20Equity%20%26%20Income%20I%22%2Cids%3A%22FOUSA00EA6%7C0P00002RHQ%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1995-10-31%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Vanguard%20Total%20Bond%20Market%20Index%22%2Cids%3A%22FOUSA00FQH%7C0P00002SXS%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1986-12-11%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Vanguard%20Total%20Stock%20Mkt%20Idx%22%2Cids%3A%22FOUSA00FQU%7C0P00002SY4%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1992-4-27%7C%7C%7Cfalse%7CUSA%7C19%22%7D%5D%2CchartType%3A%22GrowthChart%22%2Crange%3A%221995-11-1%7C2010-7-19%22%2Cperiod%3A10%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%22%22%2Csma%3A%220%2C0%2C0%22%7D
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