Offshore Drillers: A Look At The Upcoming Earnings Season

| About: Atwood Oceanics (ATW)

Summary

Earnings season is about to start for offshore drillers.

Oil prices have somewhat stabilized but offshore drilling stocks remain under pressure.

This will be a notable earnings season as fates of the companies diverge.

The earnings season has already started for many companies, but offshore drillers have yet to present their results. It's high time to look at the companies in the light of the upcoming earnings reports.

Atwood Oceanics (NYSE: ATW)

The company has not yet specified the exact day of the earnings release. Finviz estimates that earnings will be released on November 7 after the market close. Atwood Oceanics is a real battlefield for both investors and traders as we approach year 2017.

The company has a manageable debt but poor backlog, and this fact has attracted heavy interest from the short side. As a result, the company's shares are highly sensitive to any change of mood towards the industry.

Click to enlarge

Source: Yahoo Finance

Meanwhile, analyst estimates continue to fall as they realize that the projected rebound in offshore drilling is not happening. In the current market environment, Atwood Oceanics is in the vulnerable position due to its heavy exposure to UDW market.

Perhaps, the company will be able to announce some good news on the jack-up front, which in theory should serve as a cushion when oil is at $50. Atwood Oceanics has a good history of beating analysts' estimates.

Together with the high short float this does not make it a good short play ahead of earnings if you are bearish on the industry. As for the long side, my main concern remains the weak backlog in 2017.

Diamond Offshore Drilling (NYSE: DO)

The company will report its quarterly results on October 31. Diamond Offshore Drilling remains one of the strongest drillers despite recent setbacks like the termination of the contract for the Ocean Valor.

Diamond Offshore's strengths are a solid balance sheet and a visionary management team. The company's main weakness is the fleet of old stacked rigs which may never come back to the market.

Click to enlarge

Source: Yahoo Finance

Just like Atwood Oceanics, Diamond Offshore is a stable performer when it comes to beating earnings estimates. The most interesting part of the report will be the commentary on the recent Ocean Valor termination and the subsequent attempt to battle the termination in court.

As always, general market commentary from Diamond Offshore management team will be of highest interest, as the company's management is the only one who put away their pink goggles long time ago.

Ensco (NYSE: ESV)

The company will report its quarterly results on October 27 before the market open. Ensco has recently been in the news, extending the maturity of its credit facility to September 30, 2020 and providing its fleet status report, which showed a termination of the drillship contract and new contracts for jack-ups.

Click to enlarge

Source: Yahoo Finance

The story of Ensco's earnings estimates is the same as with fellow drillers - estimates are falling, both for the upcoming quarterly results and the next year. I think that short-term estimates are falling too fast, so we will see nice beats from many drillers.

Noble Corp. (NYSE: NE)

Noble Corp. will report its quarterly results on November 3 after the market close. Noble Corp. shares have been underperforming their peers lately, and this underperformance puzzles many investors.

My view is that the company's shares were initially undershorted, which limited their upside, and then became the short target which naturally pushed them down.

The analyst crowd is expecting the company to start showing red numbers, which does not make life easier for Noble Corp. shares.

Click to enlarge

Source: Yahoo Finance

The company's management will have to come up with better results if they want to break the current downtrend. The last three earnings reports missed estimates - not the performance you want from a driller in the current market environment, where each miss could be interpreted as a bad sign by the nervous market.

North Atlantic Drilling (NYSE:NADL)

In my view, North Atlantic Drilling is about to be reabsorbed by Seadrill (NYSE:SDRL) in the process of restructuring. Actual earnings numbers will be irrelevant. The company will provide earnings numbers on the same day as Seadrill and Seadrill Partners (NYSE:SDLP).

Ocean Rig (NASDAQ: ORIG)

The company has not announced the date of the earnings release. Last year, the company submitted its report on December 7. This was an outlier and I expect that Ocean Rig will announce its earnings in November. Finviz currently estimates that the company will announce its earnings on November 10 after the market close.

Click to enlarge

Source: Yahoo Finance

The company's previous report turned out to be a big event as Ocean Rig announced that it may need restructuring and could even file for bankruptcy.

I previously highlighted many red flags but did not expect that such an announcement will come so soon. Ocean Rig's management is the most unpredictable team among offshore drillers and you can expect almost everything as the last quarterly report showed.

Meanwhile, the company's shares settled below $1 as market participants prepare to hear more details on the upcoming restructuring.

Hopefully, these details will be provided when the company reports its quarterly results. However, this is not guaranteed and Ocean Rig remains a no-touch stock for everyone other than speculators.

Pacific Drilling (NYSE: PACD)

The company has not provided the date of the upcoming earnings release. Finviz estimates that Pacific Drilling will report on November 8. The company has recently received consent solicitation from its bondholders, which allowed it to draw the remaining amount available under the credit facility.

Click to enlarge

Source: Yahoo Finance

Earnings estimates are, of course, not optimistic for Pacific Drilling. I believe that the earnings number will be irrelevant this time and that the company will announce its restructuring when it reports quarterly results. Trading volume in the stock continues to fall as even hardcore speculators realize there is no hope left for Pacific Drilling.

Rowan (NYSE: RDC)

The company will report its quarterly results on November 1 before the market open. Rowan is one of the best drillers available due to the company's exposure to the jack-up segment and the healthy balance sheet. However, the company needs more than this in the current conditions for sustainable upside.

Click to enlarge

Source: Yahoo Finance

In my view, the focus will be on Rowan's ability to get new contracts. Ensco has recently shown that there's some work out there for jack-ups. Rowan is positioned to gain from this trend if the trend is there and is not limited to Ensco's marketing abilities.

Transocean (NYSE: RIG)

Transocean will announce its quarterly results on November 2 after the market close. The report and especially the subsequent earnings call should be very busy as the management will likely try to explain recent actions to both shareholders and analysts.

Click to enlarge

Source: Yahoo Finance

According to analysts' estimates, Transocean will join the "red group" next year and the focus will shift to the company's liquidity.

The recent financing deal provoked serious debate as the company's ability to raise money in the current market environment was shadowed by the interest rate that it received. Whether similar deals will follow remains a question.

The strength of Transocean contracts will also be in the spotlight, as the recent termination by Reliance Industries was a negative and unexpected surprise. Transocean shares have stabilized in recent months but the company still lacks decisive upside catalysts.

Transocean Partners (NYSE: RIGP)

Transocean Partners is waiting for the shareholder meeting on November 11 which will decide whether Transocean Partners will merge with Transocean. I have analyzed this in my recent article and I believe that the deal is good for Transocean Partners' shareholders.

Seadrill

Seadrill has not provided the date of its earnings release. In 2015, the company announced its results on November 24. This time the actual numbers will likely take second row as all eyes will be on restructuring details.

The recent rumor of John Fredriksen injecting up to $1.2 billion of cash via a loan did not provide sustainable upside to the company's shares, which are on their way to pre-rumor levels.

Click to enlarge

Source: Yahoo Finance

Seadrill has previously stated that it will announce restructuring details in December, so there's a chance that actual details won't be presented in the report and the subsequent earnings call.

In this scenario, I expect short-term downside for the company's shares as the market typically dislikes uncertainty. In my view, Seadrill remains a playground for traders until the company announces the details of the restructuring.

Seadrill Partners (NYSE: SDLP)

Seadrill Partners will provide its results on the same day as Seadrill. Seadrill has previously stated that Seadrill Partners is not part of the company's restructuring. However, some doubt always remains until the official announcement.

Click to enlarge

Source: Yahoo Finance

In my view, the company's shares might enjoy a relief rally when it's officially announced that Seadrill Partners is not part of Seadrill's restructuring. However, actual results will also matter as Seadrill Partners will be viewed as a more independent entity which will have to deal with debt on its own.

Bottom line

This will be a fascinating earnings season to watch. Companies and market segments diverge, making each stock trade on its own rather than as a group. My favorites are Diamond Offshore and Rowan. Stocks to avoid are Pacific Drilling, North Atlantic Drilling, Ocean Rig and Seadrill (until it announces the details of the restructuring). Stay tuned!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the abovementioned stocks.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.