Being an offshore driller is just not fun right now.
Year-to-date, shares of major companies have significantly
underperformed the broader market. In particular, stocks of
Hercules Offshore Inc.
Diamond Offshore Drilling Inc.
) are down approximately 32.8%, 17.0%, 15.7% and 12.9%,
respectively, while the broad-based S&P 500 index have
remained flat over the same period. What's more, according to
some analysts, the worst is still to come for these drillers.
The most pressing concern for the group, at least in the
short-term, will be oversupply in the rig market. With
multinational energy biggies looking to reign in their
skyrocketing capital expenses, the offshore drilling space is
likely to see intense competition, as multiple firms run after a
single contract. This excess capacity, in turn, could lead to
lower utilization or dayrates.
Secondly, the offshore contract drilling industry is perceived to
be a highly cyclical one and the current thought is that rates
had already peaked for this cycle back in late 2013. As the
sector looks set to enter a cyclical downturn, drillers will
prefer to hold on to their higher technology specification rigs,
thereby significantly denting the company's fleet utilization and
Last but not least, while most of the drillers boast of billion
dollar revenue backlogs, they are struggling with idled rigs - or
the ones without contracts - in a slack market. On an average,
just about two-thirds of available deepwater rigs for 2015 have
been able to find customers. Even for this year, a number of
drilling rigs remain uncontracted.
Worryingly, investors do not see an immediate rebound in the
sentiment and expect more punishing times ahead. In particular,
legacy drillers like Transocean and Diamond Offshore - with their
lower-end rigs - look to be in most trouble. This is clearly
evident from the high percentage of their float that is sold
short. Currently, the short interest ratio in both of them is
higher than 6.0, suggesting a considerable level of bearishness.
Their Zacks Rank #3 (Hold) also indicates that investors should
wait for a better entry point before accumulating shares.
However, one can look at
Seadrill Partners LLC
) as a good buying opportunity in the offshore drilling space.
The Zacks Rank #2 (Buy) firm is associated with a powerful parent
), apart from having an attractive yield and a robust near-term
DIAMOND OFFSHOR (DO): Free Stock Analysis
ENSCO PLC (ESV): Free Stock Analysis Report
HERCULES OFFSHR (HERO): Free Stock Analysis
TRANSOCEAN LTD (RIG): Free Stock Analysis
SEADRILL PTNRS (SDLP): Free Stock Analysis
SEADRILL LTD (SDRL): Free Stock Analysis
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