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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.
Reviewing Ensco's Recent Industry Presentation
- Ensco gave a presentation at the Goldman Sachs Global Energy Conference that does an excellent job discussing current industry trends and the company's positioning.
- Ensco is one of the largest offshore drilling contractors in the world, boasting a globally diversified fleet of 66 offshore drilling rigs.
- Ensco has a very well-diversified revenue base and a presence is every major offshore market. The company also has low leverage which provides safety.
- The near-term outlook for floating ultra-deepwater rigs is negative as demand is falling just as a large number of new rigs are hitting the market.
- The market for jack-up rigs is stronger than the floating market but there is a very real risk of near-term oversupply.
Reasoning For SNB Removal Of Euro Peg And Implications For Investors
Wed, Jan. 21 • Comment!
- Late last week, the SNB ended its longstanding peg to the euro, shocking the financial world.
- Economic conditions in Europe are pointing to the potential for more QE from the ECB, which Goldman Sachs apparently agrees with.
- In order to maintain its peg to the euro, the SNB would need to print enormous quantities of Swiss francs, which it appears unwilling to do.
- Swiss companies that operate internationally will likely have downward pressure on their earnings due to currency appreciation.
- Dividends paid by Swiss companies may now be more valuable than before the peg was removed.
Are Commodity Trends Pointing To A Global Economic Slowdown?
- The commodity markets can serve as an excellent gauge of the economy's overall health.
- The prices of numerous commodities have been declining in recent weeks, indicating that overall demand is decreasing.
- Oil inventories and gasoline inventories are increasing, showing that oil demand is decreasing.
- The number of jobless claims has been climbing and retail sales are decreasing, possibly caused by oil price declines.
- All of these things are signs of a weakening global economy.
Untangling Seadrill's Complicated Debt Structure
- Seadrill's debt structure is very complicated because the company has three subsidiaries whose results are consolidated into its own. It is not the sole stockholder in these.
- One of the basic tenets of corporate law is that the liabilities of a subsidiary corporation do not pass through to the parent corporation.
- Seadrill finances itself through a combination of lease-buyback agreements, bank loans, and bond debt.
- This article undoes the effects of consolidation and shows which debt is actually Seadrill's and which is owed by subsidiary corporations.
- When consolidation is undone, Seadrill's debt load is lower than it appears on the company's consolidated balance sheets.
Is ExxonMobil The Best Way To Play A Rebound In Oil Prices?
- ExxonMobil has been touted by many as a way to profit off the rebound in oil prices.
- ExxonMobil currently trades at a premium valuation to its peers and has a smaller dividend.
- ExxonMobil's stock has outperformed its peer group throughout the current decline, meaning it could have lower upside potential.
- ExxonMobil's production has declined over the past few years but its strong balance sheet offers the opportunity to turn that around.
- ExxonMobil is a viable choice to profit from an oil price rebound but some other candidates may be better.
Is Seadrill Partners A Suitable Income Investment For Retirees?
- Seadrill Partners offers a high distribution yield backed by very long-term contracts.
- However, it is not a "buy and forget" stock and the current conditions overhanging the offshore drilling market may make it difficult for the company to replace contracts.
- This could result in both cash flow and revenue declines.
- The first rig to come off contract does so in March 2015 then two more come off in April 2017.
- The distribution may be cut if the industry does not firm up by the end of 2016.
Further Evidence That Low Oil Prices Are Not Unequivocally Good For The U.S. Economy
- The mainstream media continues to propagate the myth that low oil prices are unequivocally good for the U.S. economy.
- In the past several weeks, there have been numerous indications that this is simply not true.
- Last week, US Steel announced the layoff of 756 well-paid steelworkers due to declining steel demand from the oil and gas industry.
- The number of active rigs in the United States has been declining for weeks, pointing to the likelihood of further layoffs.
- This is because the economics of shale oil production are seriously challenged at today's prices.
Examining The Current Conditions In The Offshore Drilling Industry
- Once per month, analytics provider IHS Petrodata assembles various dayrate and utilization trend information for offshore drilling rigs.
- Analysts and investors have expressed considerable concern about the currently challenging conditions in the industry.
- The offshore drilling industry is indeed quite challenging for those companies in it; however, it is not as bad as media reports would lead people to believe.
- The decline in oil prices has had an effect on the industry, particularly on contracting activity.
Is Citigroup Jumping Into The Fire?
- The derivatives market dwarfs all other financial markets in terms of size.
- There are significant risks with the derivatives market which were seen first hand when insurance giant AIG required the largest federal bailout in history a few years ago.
- The balance sheets of major banks do not adequately explain the risks that these securities pose.
- Citigroup has been rapidly increasing its derivative holdings at a time when all other participants in the market are reducing it.
- There is reason to believe that Citigroup is well aware of and concerned about the risks that it is exposing to which make its actions puzzling.
Why Declining Oil Prices Are Not Unequivocally Good For The U.S. Economy
- For the past few months, analysts have been repeating the claim that lower oil prices are a boon to the US economy but this is not completely true.
- These claims simply look at the demand side of oil prices and determine that the average consumer will have more money to spend every month.
- The decline in oil prices will have a significant negative effect on CapEx spending which will be a drag on GDP.
- The energy industry has been one of the few bright spots in the economy over the past six or seven years, providing high-paying full-time jobs.
- The reduction in oil prices could threaten many of these jobs and there is unlikely to be as desirable a replacement job for these workers.
Understanding Seadrill's Forward Financial Needs
- Seadrill has a number of new rigs scheduled to come online in the next two years for which it needs to obtain funding for.
- While Seadrill does have contracts already for some of these rigs, the majority of the company's new rigs do not yet have contracts.
- Goldman Sachs is concerned that this could put the company in violation of its debt covenants and that the company may have difficulty obtaining financing.
- Seadrill has thus far had no difficulty obtaining financing despite the challenging conditions in the industry.
- Seadrill has significant financial flexibility and this should allow the company to avoid a debt covenant violation.
Examining North Atlantic Drilling's Risk Of Bankruptcy
- North Atlantic Drilling has one of the highest debt-to-equity ratios of any offshore drilling contractor.
- The company has strong forward revenue and cash flow visibility.
- The company's revenues and cash flows look likely to decline in 2015 which will leave it unable to finance all of its maturing debt with its cash flows.
- North Atlantic Drilling does have several options available to it in the event that it is cut off from the credit market.
- The company does have some significant risks due to its dependence on several key contracts with Russian oil giant Rosneft.
Pacific Drilling Appears To Offer Impressive Opportunity Despite Risks
- Pacific Drilling has one of the most modern and technically-capable fleets of ultra-deepwater rigs in the industry.
- This positions the company quite well in the industry due to the preference that customers have for these modern rigs.
- Pacific Drilling has a history of strong growth and the potential to continue on its growth trajectory even with the current weakness in the industry.
- Pacific Drilling has some potential risks to its cash flow in the coming months but this should not have the impact that the market is implying.
- At its current levels, the stock appears to be oversold and could offer an intriguing opportunity for investors.
Why Low Oil Prices Are Not The New Normal
- Oil prices have declined precipitously over the past six months and this has strained the cash flows of the world's exploration and production companies.
- As a result of these strained cash flows, E&P companies have been decreasing their spending on exploration programs.
- E&P companies are also decreasing spending on developing many of their projects, putting 2.3 million barrels of new production at risk by 2020 and 7.5 million barrels by 2025.
- This all points to oil production being much lower by the end of the decade than it would have been had the price crash not occurred.
- This should result in the current oversupply being eliminated going forward.
Understanding The Oil Price War
- The OPEC nations, led primarily by Saudi Arabia, have been actively engaged in an economic war against Russia, Iran, and North America.
- This has had a much larger impact on oil prices than the so-called "glut," the existence of which is questionable at best.
- The purpose of this war is to weaken the Russian and Iranian economies as both are more dependent on high oil prices than the OPEC nations'.
- While the elimination of North America's shale production may or may not be the motivation, it is likely to be a casualty.
- The OPEC nations seem to expect that oil prices will surge much higher once a sizable amount of the current oil production is driven out of the market.
Seadrill At Imminent Risk Of Bankruptcy... Really?
- Some people have suggested that Seadrill may be in imminent risk of bankruptcy but the numbers say otherwise.
- Seadrill has a much higher debt-to-equity ratio than its peers. That is the cause of these fears.
- The company's strong contract status provides significant visibility into its forward revenues and cash flows.
- Seadrill generates significant operating cash flow and should be able to pay off its debt as it comes due.
- There are still risks, but the company does not appear to be at high risk for bankruptcy at this time.
Seadrill And North Atlantic Drilling Discuss The Conditions In The Offshore Drilling Industry
- Seadrill and North Atlantic Drilling consistently provide excellent analysis of the offshore drilling industry in their quarterly reports.
- Short-term, both the ultra-deepwater floater market and the jack-up market face significant pressures but the long-term fundamentals are quite strong.
- Over the next few years, aging rigs are likely to be scrapped which will help to relieve the current oversupply of rigs.
- Oil companies look likely to increase their demand for the rigs over the next years.
- The next few years are likely to be quite challenging for the companies in the offshore drilling industry.
North Atlantic Drilling's Results Are Much Stronger Than The Market Reaction To Them Indicates
- North Atlantic Drilling's results showed strong quarter-over-quarter and year-over-year growth, including a record EBITDA.
- The company is well positioned for growth going forward due to the enormous amount of oil that is located off the coast of Siberia.
- Rosneft is committed to developing its Russian reserves and North Atlantic Drilling has the most modern and capable fleet to assist in this endeavor.
- The development timetable for these Russian reserves is somewhat uncertain.
- North Atlantic Drilling's dividend cut was not out of necessity but was done so the company could strengthen its finances and better weather near-term headwinds.
First Thoughts On Seadrill's Earnings Report And Reasons Not To Panic
- Seadrill announced earnings that were quite solid despite the company's dividend suspension.
- Seadrill is now largely booked until the end of 2015, with only 9% availability following the awarding of four contracts from Petrobras.
- Seadrill's dividend suspension will allow it to reduce its debt significantly going forward and thus strengthen its balance sheet.
- The company also plans to buy back up to 10% of its current shares outstanding.
- Despite the pain that income investors are feeling now, the suspension of the dividend was actually a very prudent decision that positions the company well for the future.
Chinese And Russian Demand Provides Reasons To Be Bullish On Gold
- Gold has proven a difficult asset to hold in recent months as the dollar continues to strengthen and gold prices weaken due to the pressure this exerts.
- The actual fundamental dynamics of the market prove much more promising, however.
- The Russian Central Bank recently increased its purchases of gold several times over.
- The Chinese citizenry are now purchasing nearly all of the world's annual gold production and the PBOC is also likely to be a significant buyer.
- China has opened a physical gold exchange that could prove to be a game changer.
Could International Support For The U.S. Dollar Be Waning?
- The primary reason why the U.S. dollar is the reserve currency is that it is the dominant currency in the oil trade.
- This dominance provides a source of artificial strength in the dollar as it increases demand for U.S. dollars and U.S. Treasury securities.
- International support for this standard continues to wane as three countries recently agreed to trade oil to China in yuan and not U.S. dollars.
- The nation of France also appears to be moving away from using the dollar as the standard currency of international trade.
- If support for the dollar continues to fade, the U.S. would likely see rising interest rates and inflation at home.
Decline In Oil Prices Unlikely To Affect Linn Energy's Distribution
- Linn Energy pays its distribution by pulling oil out of the ground and selling it.
- The stock has declined along with oil prices, likely due to fears that the distribution will be cut.
- Linn Energy maintains a hedging program that effectively locks in a sale price for the company's oil production.
- The company also has a significant margin of safety in its cash flows that could help it maintain the distribution.
- Linn Energy's distribution is likely in no danger in the short-term.
Could Forward GDP Growth Prove More Elusive Than In The Past?
- Nominal GDP is equal to the velocity of money times the size of the money supply and velocity has been slowing rapidly since the 1980s.
- This means that all economic growth comes from increasing debt loads because in our financial system all money is debt.
- The effect that each additional dollar of debt is having on GDP is diminishing.
- At some point, the continual expansion of debt could stop having any effect on GDP or even begin reducing it.
- This is due to the U.S. economy becoming increasingly focused on non-value adding speculative transactions instead of actually producing things that people need.
Pacific Drilling's Latest Results Show Company's Growth Potential And An Improved Ability To Weather Industry Downturn
- Pacific Drilling's third quarter results showed significant quarter-over-quarter and year-over-year growth in virtually all metrics.
- Pacific Drilling is likely to show even further growth in the fourth quarter due to the start-up of a new rig.
- Pacific Drilling is recommending the initiation of a share buyback program pending approval by the stockholders.
- The company is in talks for two of its three rigs that need new contracts. This could result in further growth next year if it gets these contracts.
Seadrill's West Vela Deal Shows The Company's Financial Flexibility
- Seadrill is selling the West Vela ultra-deepwater drilling rig to a subsidiary of Seadrill Partners.
- This will reduce Seadrill's debt and increase its cash position.
- The deal will increase Seadrill's ability to maintain its dividend.
- Seadrill's cash flow will not be significantly impacted by the deal.
Ensco's Q3 2014 Earnings Report Shows Company's Ability To Weather Industry Storm
- Ensco's Q3 2014 report shows significant year-over-year growth despite weakness in the industry.
- Ensco has a large revenue backlog representing nearly nine quarters of revenue at its current level.
- Ensco has one of the newest floater fleets in the industry and has less availability than many peers.
- Despite the company's fundamental strength, the share price has been hammered by oil price weakness and challenging industry conditions.
Despite Some Risks, Pacific Drilling Could Offer Interesting Opportunity
- Pacific Drilling's stock price has gotten beaten down with the rest of the companies in the offshore drilling industry.
- Pacific Drilling has one of the newest fleets in the industry and demand for these rigs has held up much better than for the broader ultra-deepwater fleet.
- The company still needs to secure contracts for two new rigs in the next six months.
- Pacific Drilling has another rig coming off contract in February 2015 that needs a replacement contract.
- Despite these risks, the company could present an interesting opportunity for investors willing to take on the risk.
Tracking Utilization And Day Rate Trends In The Offshore Drilling Industry - October 2014 Edition
- The offshore drilling industry has been hit hard with concerns about falling dayrates and utilization.
- A closer look at the actual figures though reveals that much of this fear is misplaced.
- Some types of rigs continue to enjoy 100% utilization.
- Even among ultra-deepwater rigs, modern drillships have shown remarkable strength in both utilization and dayrates.
- Hardest hit have been those older ultra-deepwater semisubmersible units.
Markets Are Not Considering Weakness In Middle Class
- The middle class is frequently considered to be the driving force of the American economy.
- The middle class has less discretionary income than in the past due to the rising costs of necessities at a rate that exceeds inflation.
- Unless this is reversed, this group will not be able to consume like they have in the past.
- Yet, markets continue to ignore this reality and are still near all-time highs.
A Few Reasons To Be Cautious On ExxonMobil
- ExxonMobil has several problems which need to be corrected in the next few years.
- The company's production levels have been steadily declining since 2009.
- ExxonMobil is not generating enough free cash flow to finance its enormous share buyback program and dividend commitments.
- ExxonMobil has been taking on debt to finance its dividend and share buybacks.
- Many of ExxonMobil's forward growth projects are in Russia, which the company is pulling out of.
Statoil's New Gas Discovery Strengthens Company's Position To Be A Major Supplier To Growing Asian Markets
- Statoil recently made its seventh major discovery in the gas-rich block 2 region offshore Tanzania.
- Tanzania is ideally positioned to ship natural gas to Southeast Asia.
- Several countries in Southeast Asia are likely to greatly increase their imports of natural gas over the next two to three decades.
- Statoil has sufficient gas reserves in the country to become a major supplier to these countries.
- The company is currently constructing the needed infrastructure to take advantage of this trend.