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Offshore Drilling Companies With Newest Fleets Best Positioned To Weather Industry Problems
- The contract status of an offshore driller is important in determining its ability to maintain its cash flows during the current industry weakness.
- As a rule, those drillers with newer fleets have much stronger contract statuses than those drillers with older fleets.
- This is due to the marked preference that customers have expressed towards contracting newer rather than older rigs.
- Older rigs have begun to be scrapped due to the lack of demand for them.
- Those companies with newer fleets will be better positioned to prosper in the next industry upcycle.
Seadrill's Strong Cash Flow Provides Confidence In Ability To Handle Debt
- Seadrill is one of the most highly levered drillers due to the company's aggressive fleet build out over the past few years.
- Seadrill has approximately $1.3 billion in debt maturing in 2015 and 2016 and requires another $3.5 billion to pay for its newbuild rigs in 2015 and 2016.
- Seadrill has strong cash flows which should allow it to pay down a significant amount of this debt using just its cash.
- The bank credit and ECA markets still continue to offer Seadrill favorable terms for credit despite the concerns of analysts.
- Seadrill's strong credit coverage provides confidence in the company's ability to maintain its cash flow.
A Few Reasons To Avoid Investing In American Shale Oil Companies
- It is no longer profitable to produce shale oil in any of the major plays in the United States on a half-cycle basis.
- Most shale oil companies were not profitable even at $100 per barrel oil. That will be much worse today.
- Shale oil companies as a group dramatically overspent in an effort to grow production, meaning that bankruptcies seem likely.
- Shale oil is difficult to profitably produce because of its high decline rates, resulting in oil companies having to continuously drill to maintain production.
- Investors should avoid the sector for the time being.
Pacific Drilling Is Well-Positioned To Weather The Industry Downturn
- Pacific Drilling is one of the youngest companies in the offshore drilling industry and this has resulted in it being one of the fastest growing companies in the space.
- Pacific Drilling consistently maintains higher EBITDA margins than its competitors, meaning that the company consistently converts more of its revenue into cash flow than peer companies.
- Pacific Drilling's stock price over the past year has not reflected its financial performance and the company's future performance may be stronger than the valuation implies.
- Pacific Drilling will enjoy positive EBITDA and solid cash flows over the next two years even without any new contracts.
- The company has sufficient liquidity to meet its debt maturation, amortization, and CapEx needs over the next two years.
Madalena Energy - An Incredibly Cheap Oil Junior With Massive Potential
- Madalena Energy is a Canadian junior E&P company with a tremendous opportunity in Argentinian shale production.
- Argentina's shale plays have been attracting a lot of attention from major oil companies, which have actively been partnering with or acquiring the junior players that moved in first.
- Madalena's land holdings in the country are worth several times the enterprise value at current land valuations.
- The company has a very strong balance sheet, with no debt and significant funds flow from operations.
- Madalena Energy could be an acquisition target or a major opportunity for an investor.
Is Europe Now Assisting China In Reducing The U.S. Dollar's Dominance?
- Several emerging economies are actively working to create alternatives to the World Bank and other American-dominated international financial organizations.
- Four European nations announced this morning that they will actively assist in the creation of a Chinese alternative to the Asian Development Bank.
- The Chinese are pushing to conduct international trade in national currencies instead of the current U.S. dollar dominated system.
- The willingness of these European nations to move closer to China could indicate a willingness to use the Chinese system of international trade.
- This could result in inflation and higher interest rates in the United States.
TeliaSonera And Telenor May Be More Advantageous Investments Than American Peers
- Telenor and TeliaSonera have much better financial metrics than their American peers.
- Both companies have the potential to deliver better growth.
- TeliaSonera and Telenor have comparable dividends to their American peers but a higher dividend growth rate.
- Investors in each company would be best served by investing in standard brokerage accounts rather than in retirement accounts.
Current Oil Glut Likely To Lead To Increasing Brent/WTI Spread
- The current "oil glut" consists of approximately 0.87% of global demand. This is relatively in line with the supply/demand balance over the past few years.
- The "oil glut" appears to be almost entirely localized in the United States, with the rest of the world not seeing the same amounts of oversupply.
- The IEA expects demand to increase enough by the end of 2015 to more than eliminate this oversupply.
- Virtually, all production growth globally has been in the United States which has stringent restrictions on exports. This is leading to rapidly growing inventories domestically.
- This may lead to the spread between global oil prices and the U.S. ones increasing.
Don't Get Too Excited About The March Jobs Report
- The March jobs report was largely praised by the media and Wall Street, but there are a number of reasons not to buy into the hype.
- Despite the unemployment numbers, the number of full-time jobs in the United States remains lower than in February 2008 despite the population increasing by 17 million.
- Independent companies report that the number of job losses in the energy sector are vastly above what the BLS report shows.
- More than half of all jobs created in February are in low-paying professions that do not provide the discretionary income needed for an economic recovery.
Analyzing Dayrate And Utilization Trends In The Offshore Drilling Industry
- Utilization for ultra-deepwater rigs has been falling, although in the case of semi-submersibles, it remains higher than its September 2014 low. Dayrates were slightly stronger month-over-month.
- The utilization rate for shallow-water backups has also been falling, but dayrates have been holding up quite well. The average market dayrate increased month-over-month.
- Harsh-environment jackups continue to enjoy a 100% utilization rate but the dayrates have been declining.
- There is certainly an oversupply of rigs worldwide in all categories except for harsh-environment shallow-water, and the decline in oil prices will make this worse.
- Harsh-environment drillers may see declining cash flow as they recontract their rigs.
Telenor's Growth Makes It A Strong Investment Prospect
- Telenor is one of the strongest growing telecoms in Europe, increasing its revenues by more than 10% YOY.
- The company's move into the nation of Myanmar has proven to be a growth driver, adding more than 3.4 million new subscribers in that market alone.
- Other Asian markets also provided significant growth for the company.
- Telenor continues to struggle in Thailand, but currency fluctuations proved to benefit the company's top line in the quarter.
- The company's growth in other markets overcome its weakness in Thailand.
The Stock Market Has Disconnected From Economic Reality
- For the past few months, economic data has been disappointing, yet the stock market continues to trade upward to new highs.
- Consumer spending has declined for two months in a row. This has not happened since the months following the collapse of Lehman Brothers.
- The ISM Manufacturing Index has now declined for four months in a row, indicating a slowdown in the economy.
- The Goldman Sachs Leading Indicator Index states that the global economy is currently in contraction and earnings among the S&P 500 are expected to decline YOY.
- The Shiller PE is now at a level that it has rarely reached in the past 125 years and indicates a market that is much more expensive than normal.
Want To Know The Future Of Oil Exploration? Look To Russia
- The largest American oil companies failed to discover enough oil to maintain their reserves in 2014.
- The major American oil companies largely focused their exploration efforts in the United States and the Americas in general.
- The largest Russian oil companies managed to grow their reserves by focusing their exploration efforts on Russia.
- A significant percentage of the world's undiscovered oil reserves are likely to be located onshore and offshore Russia.
- ExxonMobil has significant acreage there but requires the sanctions to be listed to exploit them. Chinese oil companies may also have a strong opportunity in the country.
North Atlantic Drilling: First Impressions Of The Company's Results
- North Atlantic Drilling saw quarter-over-quarter revenue declines due to one rig going off contract and downtime due to repairs.
- The company is likely to see further challenges throughout this year.
- The company reported a large loss due to a reduction in its business prospects.
- This reduction in its prospects forced it to take a one-time non-cash charge against its goodwill.
Seadrill Well Positioned To Weather Industry Downturn But Investors Should Still Be Cautious
- Seadrill's results were quite respectable, with the slight decline in revenues being due to rig downtime.
- Seadrill saw three new ultra-deepwater drillships begin working this quarter. These will serve as a growth driver over the next quarter.
- Seadrill enjoyed success getting new contracts, but these are not as good as the ones it was getting back during the sector boom.
- Seadrill suffered from contract cancellations and may see more in the coming months.
- Thus far, Seadrill has not been having trouble getting financing but the company warns that financing is becoming harder to get.
Pacific Drilling's Q4 Results Quite Good, But Earnings Likely To Decline Going Forward
- Pacific Drilling beat estimates on both revenues and earnings.
- The company showed strong quarter-over-quarter growth due primarily to a new rig operating for its first full quarter and a second rig getting a higher dayrate.
- Pacific Drilling initiated a stock buyback program during the quarter and has bought back more than four million shares under this program.
- One rig is scheduled to go off contract in the first quarter. This will result in revenue decreases in the first and second quarters.
Oil Prices Could Be Higher By The End Of The Decade
- Analysts appear to be conflicted as to whether oil prices will be higher or lower over the coming years.
- The current market oversupply is not particularly great compared to past oil shocks and will be wiped out by demand growth going forward.
- Nearly all new production is unconventional oil, which requires much higher prices than today's to be profitable.
- The decline in oil prices has caused many companies to postpone investing into those projects needed to satisfy the 10% demand growth by the end of the decade.
- This could result in a situation in which demand for oil exceeds supply, pushing oil prices upward.
The Reserve Developments At These Two Oil And Gas Companies Are Worrying
- It is important for an oil and gas company to discover enough new oil and gas to replace that which it extracts out of the ground to be sustainable.
- Both Statoil and Total saw their reserve base shrink over the past year.
- Statoil is cutting its exploration budget in 2015 which might hinder its ability to discover new sources of resources.
- Total is actively selling off assets and cutting its exploration budget which may also lead to shrinking reserves.
- Both companies have the wherewithal to withstand this in the short-term but they both need to correct this problem over the medium-term.
Total's Results Better Than They Seem, Company Is Positioning Itself Well
- Total reported a large net loss in the fourth quarter but this was due to paper losses on assets. The company's operations were profitable.
- Total is reducing its spending on developing new fields in 2015 due to the decline in oil prices.
- Total is likely to grow its production significantly in 2015, providing support for cash flow.
- Total is reducing exploration spending in 2015, which could exacerbate its problem of declining reserves.
- Total's moves provide support for its strong dividend, which it kept steady.
Could These Developments Prove Bullish For Gold?
- There has been a steady transfer of physical gold from Western nations to Eastern ones over the past few years.
- Russia has, despite rumors to the contrary, not been selling off its gold holdings but has actively been increasing them.
- Gold demand from India could increase due to a proposal to reduce the country's import tariff on gold.
- China alone imported more than the entire world's annual production of physical gold in the month of January.
- The physical settlement facility at the Shanghai Gold Exchange could lead to improved price discovery.
Analyzing The Impact Of The Petrobras Contract Cancellations On Seadrill's Cash Flow
- Petrobras recently cancelled two contract extensions with Seadrill. This will result in the latter company's cash flow declining over the next year.
- The West Taurus rig generates approximately 5.3 to 5.5% of Seadrill's third quarter cash flow, depending on uptime assumptions.
- The West Eminence rig generates approximately 4.7 to 4.9% of Seadrill's third quarter cash flow, depending on uptime assumptions.
- Seadrill's cash flow will likely decline by more than the combined total of these two rigs once the current contracts end because of the need to pay off debt.
Analyzing The Revenue Impacts That The Petrobras Cancellations Will Have On Seadrill
- Seadrill recently announced that it no longer expects Petrobras to execute on the contract extensions for two of its rigs that previously looked likely to happen.
- This will reduce the company's 2015 revenue accordingly.
- The West Taurus goes off contract in February and represents approximately 4.3% of Seadrill's total revenue.
- The West Eminence represents approximately 4.1% of Seadrill's total revenue and goes off contract in July.
- This development is likely to reduce Seadrill's revenue by 8-8.5% by the end of the year, excluding positive impacts from other sources.
Could These Events Threaten The U.S. Dollar's Reserve Status?
- The primary reason why the US dollar has become the reserve currency in the world is because of its dominant position in the oil trade, enforced by the Saudis.
- This creates artificial demand for the US dollar from oil importing nations.
- This creates a steady demand for US Treasury securities from oil exporters, helping to keep interest rates low despite huge deficits.
- China is now Saudi Arabia's largest customer and China is looking to do all energy trades in RMB, not US dollars.
- Russia has outright abandoned the petrodollar and Saudi Arabia may be next.
Suncor Energy's Results Hurt By Oil Prices, Company Still Positioned To Prosper
- Canada's Suncor Energy's fourth quarter results were significantly impacted by the recent decline in oil prices.
- The company still has growth potential due to its enormous reserves in the oil sands. This lessens the company's need to explore for more oil.
- The Fort Hills project is still slated to come online in Q4 2017, resulting in growth from its oil sands operations that will produce cash flow for fifty years.
- Suncor has been implementing a capital spending and cost reduction program to preserve its free cash flow.
Statoil's Earnings Affected By Oil Prices, Company Well-Positioned To Prosper Going Forward
- Statoil's earnings were negatively affected by the recent plunge in oil prices just like all other companies in its industry.
- The company's revenue remained fairly strong, due largely to the strength in the U.S. dollar against the Norwegian krone.
- Statoil is likely to grow its production over the next two years.
- The company is taking steps to strengthen its cash flow in light of the new price environment for oil.
- Statoil should remain free cash flow positive at a price of $30/bbl for oil by 2016.
Seadrill's Earnings Likely To Fluctuate Despite Cash Flow Stability
- Seadrill has a strong contract position for its rig fleet and this is likely to give the company some cash flow stability.
- This does not apply to earnings as the company has a substantial investment portfolio and holdings of interest rate swaps.
- The need to adjust the values of these financial instruments can have positive or negative effects on the company's earnings.
- The company's stock portfolio may have suffered paper losses that will need to be written off due to the fall in oil prices.
- The company's interest rate swaps move with interest rates.
The Jobs Situation Is Not As Strong As Policymakers Believe
- Politicians and other policymakers have been consistently stating that the positive trends in the unemployment rate are one of the governing factors in future decisions.
- There are numerous problems with the unemployment rate as it is currently calculated and this results in it providing a misleading figure.
- The unemployment rate does not considered discouraged workers who want to work but have not actively looked for work in the past four weeks.
- The labor force participation rate has been falling and this is not being caused by the baby boomers retiring.
- The fall in oil prices may make the jobs situation much worse.
Examining Trends In The Offshore Drilling Industry - January 2015 Edition
- The IHS Petrodata report is one of the best sources of information for investors interested in the offshore drilling industry.
- The utilization rates for ultra-deepwater drillships are falling along with dayrates. However, this is not the case with ultra-deepwater semisubmersibles.
- Harsh-environment rigs continue to operate with 100% utilization rates although dayrates are declining.
- Shallow-water jack-up rigs have seen both falling utilization and dayrates in the past month.
- The weakness is caused by constrained cash flows among the oil and gas companies that engage in offshore drilling.
TeliaSonera's Revenues Under Pressure But Company Weathering Well
- TeliaSonera announced fourth quarter 2014 and full year 2014 results that would likely disappoint many investors.
- The company's revenue declined year-over-year due to weakness in Asia and Europe.
- TeliaSonera is taking steps to handle this revenue decline and the company managed to increase both EBITDA and net income for the fourth quarter year-over-year.
- TeliaSonera maintained its dividend year-over-year.
More Evidence That Low Oil Prices Are Not Unequivocally Good For The American Economy
- Over the past few weeks, further data has come out that shows that the rapid decline in oil prices that recently occurred is not a net positive for the economy.
- Factory orders are down significantly, largely because the energy industry is a major source of demand for American manufacturers.
- Manufacturing jobs are, like energy jobs, high-paying positions and a slowdown in manufacturing could lead to a reduction in consumers' buying power.
- Markit's Services PMI shows that the sector is expanding but that the rate of expansion is slowing.
Understanding Seadrill's Complicated Financial Structure: The Asset Side
- Seadrill has a very complicated financial structure because it consolidates the balance sheets of three companies into its own without owning any of them completely.
- These three companies are North Atlantic Drilling, Sevan Drilling, and Asia Offshore Drilling.
- Some of the assets that Seadrill shows on its balance sheet are actually the property of one of these three companies and not Seadrill itself.
- To better understand Seadrill's financial situation, an investor should bear in mind what is actually the property of Seadrill and what is the property of one of these companies.
- Seadrill owns the majority stake of all three companies but does not own any of the three outright.
Ocean Rig's Thoughts On The Outlook For The Floating Rig Market
- Ocean Rig provided an in-depth analysis of the floating drilling rig market in a recent presentation to investors.
- The floating rig market is currently quite challenging due to several factors including a reduction in demand for floating rigs and increasing supply.
- Oil and gas companies have been expressing a marked preference for contracting modern offshore drilling rigs and thus making it difficult for older rigs to get contracts.
- The supply of older rigs is thus likely to fall and cause the worldwide floater fleet to decline over the next two years.
- Unless oil and gas companies increase their demand for floating drilling rigs, the market is likely to remain challenging until at least 2017.