Offshore Drilling: Latest Fleet Analysis Suggest More Pain - Analyst Blog

The latest spate of fleet status reports - with news of idled rigs, shrinking dayrates and lack of new contracts - provide further evidence that offshore drillers are still facing a bleak industry outlook.

Year-to-date, shares of major rig contractors have significantly underperformed the broader market. In particular, stocks of Hercules Offshore Inc. HERO , Transocean Ltd. RIG , Diamond Offshore Drilling Inc. DO and Ensco plc ESV are down approximately 51%, 23%, 26% and 31%, respectively, while the broad-based S&P 500 index has gained 1.5% over the same period. Most are trading at or close to their 52-week lows. What's more, according to some analysts, the worst is still to come for these drillers.

Decline in Rig Activity Volume

As oil remains in a bearish territory and flirts with the $40-a-barrel level, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers as offshore exploration for new oil and gas projects has almost come to a standstill.

In its latest international, oil services player Baker Hughes Inc. BHI said that rigs engaged in exploration and production totaled 1,275 in Feb. This was down by 66 from the year ago period.

Rig Oversupply

With large, multinational energy firms looking to reign in their skyrocketing capital expenses, the offshore drilling space is witnessing intense competition, as multiple firms chase a single contract. This excess capacity, in turn, could lead to further lowering of utilization or dayrates.

Downbeat Fleet Updates: More Rigs Stacked, Scrapped

On Wednesday, world's largest offshore driller Transocean said that that it has stacked the previously idle ultra-deepwater floaters Discoverer Spirit, GSF Jack Ryan, Deepwater Discovery, and Deepwater Pathfinder. Transocean also announced its plans to scrap the rigs Deepwater Expedition, Transocean Legend, Transocean Rather, and GSF Arctic III. The Switzerland-based company intends to dismantle a total of 16 floaters - including the above-mentioned rigs - to lower costs in an effort to turn around.

Meanwhile, Diamond Offshore, in its monthly fleet status report, added another floater to its stacked fleet. In fact, Ocean Yorktown is the 8th floater the company has either retired or cold stacked since the market downturn began in late 2013. What's more, there was no mention of any new contract or extension in the report.

There Is Just No Bottom in Sight

Investors do not see an immediate rebound in the sentiment and expect more punishing times ahead with crude prices in a freefall. With inventories brimming, the commodity is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, oil is likely to continue its downward journey in the short term atleast, piling more misery on the hapless drillers.

In particular, companies with a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like Vantage Drilling Co. VTG , Seadrill Ltd. SDRL and Ocean Rig UDW Inc. ORIG look to be in the most trouble. These drillers have negative returns year to date and has been witnessing downward earnings consensus estimate revisions for the current quarter and year.

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BAKER-HUGHES (BHI): Free Stock Analysis Report

ENSCO PLC (ESV): Free Stock Analysis Report

TRANSOCEAN LTD (RIG): Free Stock Analysis Report

DIAMOND OFFSHOR (DO): Free Stock Analysis Report

SEADRILL LTD (SDRL): Free Stock Analysis Report

HERCULES OFFSHR (HERO): Free Stock Analysis Report

OCEAN RIG UDW (ORIG): Free Stock Analysis Report

VANTAGE DRILLNG (VTG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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