This afternoon, Barron's reported that Raymond James, in an article titled, "Offshore Drillers: No, It's Still Not Time To Buy", indicated the offshore drilling industry is "in the early innings of a cyclical downturn in utilization and day-rates". Seadrill (NYSE:SDRL) and Transocean (NYSE:RIG) were among those highlighted for their year-to-date underperformance. Today's article is in contrast to last week's upgrade by BMO Capital Markets, where their analyst upgraded SDRL and selected other drillers from Underperform to Market Perform. Raymond James noted that the downturn is being driven by oversupply of new rigs and will take "three years to play out" and the implications would include day-rates falling by 25% and 60 rigs being stacked. The investment bank also indicated its concern that 2016 earnings estimates need to be reduced by 25%.
In light of the BMO upgrade last week, this analysis was not expected. It reflects an alternate view to the one I hold, that secular demand will increase due to geo-political factors. Interestingly, both SDRL and RIG are up by close to 1% on the day, perhaps reflecting that all of the bad news has already been absorbed by the market.
This negative forecast causes me to re-examine the underlying dynamics of the market, but does not ultimately change my positive outlook, which is driven by evolving geo-political factors more than traditional supply and demand dynamics.
Disclosure: The author is long SDRL, RIG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.