Drillers Are Oversold - Is It Bottom Fishing Time?

by: ZGI Research
  • Global turmoil, the sunken Deepwater Horizon and the oil leak aside, the offshore drillers will once again be the go-to defensive sector. Since April 20, the Oil Service Index (OSX) is down by 20.1% (as of intraday May 20). Such behavior by investors is unwarranted and the degree of this sell-off is not sustainable.
  • We are not sure when the selling will end, maybe it was yesterday, today, the next couple of days or next couple of weeks, but we can point out that shares are reaching new lows for 2010. The reflective under-performance of the sector is a reflection of the current global turmoil surrounding the financial sector, the Greece debt fiascoes, and the EURO currency which is heavily weighted and has contributed approximately 70% to the downfall. The remaining 30% relates to the uncertainty surrounding the leak crisis and the temporary freeze in drilling permits in the U.S. Gulf of Mexico. While some of the uncertainty has not yet been cleared, there remain a number of concerns relating to rigs operating in the region and its operational impact to the environment.
  • Moreover, the uncertain outlook for the global economy in the short and medium terms makes it difficult to assess related risks with accuracy, and hence valuations for the drillers are becoming highly subjective. Despite these uncertainties, we are maintaining our long-term investment thesis which is based on the estimated and solid $80 billion of backlog for our universe, as well as our expectations that capital spending should increase in the range of 13.7-15% this year.
  • We recommend going fishing and pick the following names off the bottom: ENSCO (NYSE:ESV), Diamond (NYSE:DO), Pride (NYSE:PDE), Rowan Cos., (NYSE:RDC), Transocean (NYSE:RIG), Noble (NYSE:NE), Seadrill (NYSE:SDRL) and Hercules Offshore (NASDAQ:HERO).

Disclosure: All of the recommendation and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover of this report. Does not own any of the mentioned securities.