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Offshore drillers whacked at Deutsche Bank, several names cut to Sell

  • Deutsche Bank issues a scathing negative call on offshore drillers, believing the market is mistaking a wholesale recapitalization of the offshore rig fleet for a more benign cyclical downturn.
  • The firm thinks Transocean (NYSE:RIG) and Diamond Offshore (NYSE:DO) will be forced to cut their dividends, downgrading both stocks to Sell from Hold; RIG's target price is cut to a Street-low $27 from $45, while DO is cut to $34 from $60.
  • Ensco (NYSE:ESV) also is cut to Sell from Hold with a $41 price target from a prior $52; Noble Corp. (NYSE:NE) is downgraded to Hold from Buy with a $28 price target, down from $50.
  • RIG -2.4%, DO -1%, ESV -1.3%, NE -12.5% premarket.
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Comments (38)
  • Research and Value
    , contributor
    Comments (81) | Send Message
     
    DB seems to be basically saying that there is oversupply in the rig market. This is super old news. How is this new? This is very well known by the market for a while now, down to knowing approximately how many new rigs are entering the market every quarter/year, and how supply picture looks like by rig type.
    4 Aug, 08:47 AM Reply Like
  • Brian B.
    , contributor
    Comments (47) | Send Message
     
    I read this differently, I think they are saying there is not going to be much demand going forward for older rigs, everyone wants the newer rigs and most of the offshore drilling companies are behind the curve of moving to those newer rigs (except SDRL, interesting not mentioned in their article).
    4 Aug, 10:17 AM Reply Like
  • Research and Value
    , contributor
    Comments (81) | Send Message
     
    Brian,
    I simply read what it says: "Wholesale recapitalization of the offshore rig fleet" refers most likely to supply, no? DB has no idea, neither do most people how demand is going to develop over the next several years.
    With respect to "benign cyclical downturn", I think what they are saying is, people think that stocks are down because of a benign cyclical downturn, but the real problem is large supply coming online. I do not think DB is making a call that demand will continue to stay down over the next several years, they are probably saying that the supply increase is so large that the demand will not be able to absorb it, in their opinion. My take (though I have not seen their research).
    My response to that is, well the market already knows very well what the supply increase is, so that is really not news at all. With respect to demand, well that is much less predictable over the next several years, though under current oil price ranges it will most likely continue to grow. Whether and when it will be able to absorb all the increased capacity, we have to see. That is an unknown. I doubt that DB woke up today with this brand new insight on what will offshore rig demand do over the next several yard - but then maybe they did?
    4 Aug, 10:42 AM Reply Like
  • Brian B.
    , contributor
    Comments (47) | Send Message
     
    R&V,

     

    as with you, I don't have access to the report, so I'm just trying to interpret the headlines. However, I read it a little differently than you.

     

    You have a premise that there is an oversupply of rigs. I don't think that is the case. The market is demanding the new rigs, not the old. That isn't an issue of overall level of demand for rigs, but of the type of rigs that are in demand. If there was an oversupply problem (that is we aren't distinguishing between the demand for old versus new rigs) then there wouldn't be a need for "a wholesale recapitalization of the rig fleet". Wholesale to me means that the majority of the rigs, which are older generation, will need to be replaced, or recapitalized as they state.

     

    Also, if there was an oversupply problem, with no distinction between demand for old versus new rigs, then why wouldn't this also impact SDRL? The absence of mentioning them seems to strengthen the interpretation that it is old rigs that will have declining revenue, or no demand at all. That is why those companies mentioned may need to reduce their dividend. Also, as SDRL has brought on new rigs they are getting excellent prices for them, there are no signs that price is down for them, only for the older ones.
    4 Aug, 12:01 PM Reply Like
  • Research and Value
    , contributor
    Comments (81) | Send Message
     
    Brian,

     

    I see, you are talking about the so called "bifurcation", which refers to preference of new rigs to old rigs. Well, let me say that this is even more super old news, and the market is well aware of it - this has been widely talked about and discussed for several years now. If DB just discovered this today, that would be very unusual. On a different note, bifurcation is a sub-set of oversupply, and here is how I think about it.
    There are still lots of old rigs that are worthy for their jobs (not all, but decent majority). However, all else equal, the drillers clearly prefer newer rigs because they can pick and choose. This drives down prices for both newer and older rigs, and all get hurt. Typical symptom of industry oversupply.
    4 Aug, 12:10 PM Reply Like
  • 2839298249
    , contributor
    Comments (270) | Send Message
     
    BB and RV: old rigs will still find work in the marketplace, in particular N Sea, SE Asia, Trinidad, etc. Not every company requires a semi or drillship that can operate in 10000ft of water. Also a midwater 3G or 4G semi has half the day rate of a 6G drillship or semi. Not every operation requires the latest tools.

     

    This bifurcation story is as stale as a 3 day old bagel. Older rigs will be retired more quickly now. The risk is that 5G and 6G rigs cannot find appropriate work and move "down market" to fill work that would otherwise be done with lesser equipment. This would definitely pressure day rates across the board.

     

    As for jack-ups, as I believe that market is oversupplied by 75+ rigs for the foreseeable future. We'll see more cold-stacking there.
    4 Aug, 12:35 PM Reply Like
  • NV_GARY
    , contributor
    Comments (2310) | Send Message
     
    Brian-
    I wondered about SDRL too-- perhaps they have already done a 'Sell' and just did not mention it as news?
    4 Aug, 01:12 PM Reply Like
  • Debutant
    , contributor
    Comments (2250) | Send Message
     
    For SDRL they have "hold" and $36 target price
    4 Aug, 01:28 PM Reply Like
  • ross westgate
    , contributor
    Comments (103) | Send Message
     
    all i can do is snicker. DB lost their patience? I recall viewing the file date purchases of RIG on BB and DB bought a large amount of shares, say, 2 months ago. Lost patience?? isis is waking up from ramadan, libya is a crap show, saudi is making a fuss this way and that, and fracking is not a long term reliable source (imo). American fracking is trend....
    4 Aug, 08:48 AM Reply Like
  • HHE Invest
    , contributor
    Comments (31) | Send Message
     
    all I can say is: They got a hidden agenda..
    4 Aug, 08:52 AM Reply Like
  • longoil
    , contributor
    Comments (764) | Send Message
     
    I would not put much faith in Deutsche Bank forecasts.
    We have seen countless incorrect forecasts from them in the past.
    A 10 year old with a pair of dice can make better predictions than their team of MBAs and PhDs.
    4 Aug, 08:56 AM Reply Like
  • ross westgate
    , contributor
    Comments (103) | Send Message
     
    Pal, until this revelation i always looked to DB more so than any other analysts in general. Perhaps im bias since im long RIG.
    Let s hammer it out: Off shore is a short target full stop. Divvy or not, oil is located off shore. I like the divvy but first and foremost i want the black stuff, and once Iraq and Libya come back into focus and fracking has an earth quake, well...
    no offense to frackers etc... but if it really is as environmentally degrading as the euros believe it to be do we go back to coal? My point is, these sectors are administration dominated full stop.
    4 Aug, 09:02 AM Reply Like
  • Stock Market Mike
    , contributor
    Comments (2172) | Send Message
     
    Absolutely agree - public sentiment on fracking is already lukewarm. I keep getting notices in my inbox about how dirty/destructive it is, compared to even the tar sands. One big fracking disaster similar to the BP spill and the whole sector is going into a long term downtrend. Even if that doesn't happen, there's not enough oil there for "energy independence", so other sources will have to be utilized soon, if not this year or next.

     

    -Mike
    4 Aug, 01:24 PM Reply Like
  • giofls
    , contributor
    Comments (142) | Send Message
     
    Hold ESV and sold Jan $55s for just under $2. If I can use this news to buy the calls back for about 1/3 of what I got paid for them, that will be a huge win. There will be an uptick soon and I'll re-sell the calls and add to my yield.
    4 Aug, 09:04 AM Reply Like
  • Brogembank
    , contributor
    Comments (19) | Send Message
     
    These dudes at DB can't even get their own peolple to behave as they should, so why heed their probably self-serving advice?

     

    Long NE, SDRL and RIG
    4 Aug, 09:13 AM Reply Like
  • bones2180
    , contributor
    Comments (63) | Send Message
     
    I would own the driller stocks before I owned DB stock
    4 Aug, 09:30 AM Reply Like
  • chopchop0
    , contributor
    Comments (3439) | Send Message
     
    I would rather own neither. Drillers have been big DOGS coming out of the 2009 bear market.

     

    Deepwater drilling is expensive and there are lots of good alternatives on land.
    4 Aug, 10:13 AM Reply Like
  • Overanalytical
    , contributor
    Comments (769) | Send Message
     
    This isn't near enough to qwell my excitement for the company.

     

    (Still) Long ESV
    4 Aug, 09:34 AM Reply Like
  • 11146471
    , contributor
    Comments (757) | Send Message
     
    They were saying the same for KORS, but today they were naked in front of their investors...KABAM! huge double surprise both beating earnings and revenues...

     

    All I can say they don't know what they are talking about.

     

    Do Not Follow Them... So simple!
    4 Aug, 09:35 AM Reply Like
  • HHE Invest
    , contributor
    Comments (31) | Send Message
     
    As I wrote earlier; hidden agenda
    4 Aug, 09:43 AM Reply Like
  • u01bsb0
    , contributor
    Comments (639) | Send Message
     
    Transocean only recently upped their dividend. Why would they increase it only to cut it a couple of months down the line. They can obviously see further into their financial future than deutsche bank.

     

    As well as this, they are now getting another good income stream from their Shell contract which started in July earning them over $600k a day.
    4 Aug, 09:44 AM Reply Like
  • 2839298249
    , contributor
    Comments (270) | Send Message
     
    The problem with the sector is a lack of catalysts to take it higher. Cheap and yield obviously isn't enough. We will need to see some older rigs stacked (DO/RIG will eventually do this), the signing/rolling of contracts at similar rates, new contracts signed in Brazil, West Africa and Mexico which absorbs supply, scared investors need to sell-out, every analyst has to be a bear, etc. In the meantime we just chop around or maybe drip lower.

     

    There have been a few glimmers of hope, in particular the massive NADL/Rosneft deal.

     

    I would definitely like to see some action on contract renewals with Petrobras.
    4 Aug, 10:08 AM Reply Like
  • Brian B.
    , contributor
    Comments (47) | Send Message
     
    As I read this what they are saying is that the price for older rigs is not just in a cyclical downturn, but will need to be replaced with newer generation rigs(recapitalized). So companies with older rigs will need to spend a lot of money buying new and will find it hard to generate revenue from older rigs.

     

    What isn't said explicitly is one company has already done this, SDRL. I read this as a very strong endorsement for SDRL, big first mover (or already moved) advantage.

     

    Very long SDRL.
    4 Aug, 10:10 AM Reply Like
  • Weston McCollum
    , contributor
    Comments (112) | Send Message
     
    I'll stick with ESV, second oldest fleet, but strongest balance sheet.
    4 Aug, 07:46 PM Reply Like
  • 2839298249
    , contributor
    Comments (270) | Send Message
     
    BB-Need the older rigs to disappear and shrink the pool of available rigs. Also, if 5th and 6th gen rigs cannot get work they will displace the 3rd and 4th gen rigs with less high spec work, albeit at lower rates. I believe we'll see DO and RIG cold stack at least 4+ rigs each.

     

    Jack-ups right now are a bit oversupplied.

     

    Yes, SDRL/NADL are already there.
    4 Aug, 10:19 AM Reply Like
  • sinedo
    , contributor
    Comments (320) | Send Message
     
    If anyone has ever made money following Big Bank/Broker advise, please let us know. Their advice is meant to benefit their holdings, long and short, not ours.
    You will usually make money doing the opposite of their recommendations.
    Regards,
    4 Aug, 10:34 AM Reply Like
  • Tridentine
    , contributor
    Comments (50) | Send Message
     
    You will see consolidation in these companies well before you see DBs new price targets.
    4 Aug, 11:35 AM Reply Like
  • William M. Wright
    , contributor
    Comments (241) | Send Message
     
    Analyst are reporters. They tend to be better at reporting what has happen and outlining known trends in place then predicting turning points or future stock prices. The trend towards expanding on-shore drilling and recover technics using new horizontal drilling/fracking in USA's shale fields has now been in place for nearly a decade. And the notion that onshore fracking is more environmentally dangerous than drilling in mile+ deep-water is nonsense. One need only review the history of offshore drilling (and oil spills) environmental disasters to know that fact. Of course offshore drilling in deep-water will continue to expand but at a slower near-term rate amidst greater competition pricing pressures from many new rigs and companies like ESV and SDRL who just entered the deep-water drilling business over the last decade. The biggest boom in offshore drilling and rig pricing appears to have peaked around 2007/08. At the same time over the last decade there has been an expansion in the delivery of more modern deep-water drilling rigs. One need only look at the stock price trends of DO and RIG vs. ESV and SDRL to know whose stock prices benefited from having a younger more modern deep-water drilling fleet since 2007.

     

    Bottom-line one can rationalize their favorite offshore-drillers strengths. But in the short-run these stocks are highly correlated and move in tandem. I'm glad I sold all my RIG, ESV and SDRL shares in July after buying in March and April (thinking that was the near term bottom). If all the deep-water drillers have declined since last November 2013 in a booming stock market I'm now in no hurry to buy them back in todays weak market given todays increased risk of a market pull-back or correction now in place.
    4 Aug, 12:01 PM Reply Like
  • Debutant
    , contributor
    Comments (2250) | Send Message
     
    I think that Deutsche Bank got this one wrong.

     

    If I am right (and DB is wrong), then nothing will change for me or for my portfolio.

     

    But, if I am wrong and some of those drillers face as significant share price falls as DB is predicting, then I will be a buyer at those prices for the aftermath of that so-called wholesale recapitalization.

     

    For now I am sitting on my hands and waiting for the time to tell.
    4 Aug, 12:52 PM Reply Like
  • combatcorpsmanVN
    , contributor
    Comments (791) | Send Message
     
    $RIG - I would love to see the so-called 'analysis' done by DB. Usually, I disregard WS analysts b/c they're told to 'create a story' that the Retail force can use to create portfolio movement. In this particular instance, I would like to see EXACTLY when DB purportedly sold their position in RIG. There are Securities law issues as well as NYSE rules that govern the timing of issuing analysts recommendations and changes in a firm's inventory in those shares. Moreover, there are ethical considerations when price targets are placed significantly below existing prices that have already fallen by 30% or more. In this case, RIG's one year high price was $55/sh and has been selling around $40/sh for a period of time. Now, comes a 'sell' recommendation and a new 'target' price well below the current price. That smells 'fishy' to me.

     

    There is always the possibility that DB is calling it the way they see it. IMO WS's reputation isn't sweaking clean so I'm skeptical (to say the least).
    4 Aug, 01:13 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (2338) | Send Message
     
    I dont give a $hit abt DB or their predictions. My clients and i will stick w our divs from ESV-and NE for another client-and continue to reinvest the those divs, esp if we see lower prices.
    4 Aug, 11:32 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2747) | Send Message
     
    I think the mistake DB is making here is that they see older rigs as competing against newer strictly on price. The analyst projects falling prices for newbuild leases because "an older rig can do the job".

     

    That's not why big oil likes newbuilds. They like not being sued in international courts. They like not having spills. They like not having unscheduled downtimes. They like not having negative publicity -- wow look at that devastated coastline and all because you went with ElCheapo Driller. They like not having new regulations imposed because they were careless and made a mess. They like not being banned from Brazil, the Gulf of Mexico, and the North Sea.

     

    This costs money:
    http://onforb.es/1uhn631
    5 Aug, 01:23 AM Reply Like
  • Debutant
    , contributor
    Comments (2250) | Send Message
     
    "...... wow look at that devastated coastline and all because you went with ElCheapo Driller"

     

    But, the analyst from LaBancaConGrandeProblema JudiciaraEtFinanziara, aka DB, simply ignored that fact.
    5 Aug, 06:04 AM Reply Like
  • ppars
    , contributor
    Comments (95) | Send Message
     
    Well said, Bones. What the heck does DB know anyway. Within one year they will be eating both of their left feet. Long SDRL and considering RIG.
    5 Aug, 04:38 PM Reply Like
  • HHE Invest
    , contributor
    Comments (31) | Send Message
     
    SDRL is known to have one of the youngest fleet in the world regarding UDW units. This (with a great utilization record) is supposed to give an advantage when bidding on contracts. What about PACD? Only 8 units, but all of them are newest UDW and start to distribute dividends in 2015 (approx around 7% yeld)

     

    Long SDRL, PACD, BW Offshore
    6 Aug, 02:34 AM Reply Like
  • DaveCox
    , contributor
    Comment (1) | Send Message
     
    I think geopolitical events will curtail oil shipments from the Middle East dramatically very soon. This will lead to a lot of development of new properties in calmer regions of the world. If a general war breaks out between the 'East' and the 'West' oil prices will really go through the roof; it is a finite resource after all. I'm long Rig, and plan to hang in there.
    6 Aug, 03:26 PM Reply Like
  • ross westgate
    , contributor
    Comments (103) | Send Message
     
    So RIG earnings are positive for 2nd quarter again. Will be interesting to hear short arguments to the contrary.
    7 Aug, 02:48 AM Reply Like
  • HHE Invest
    , contributor
    Comments (31) | Send Message
     
    Positive news from PACD also

     

    (From the Q2 report)

     

    • EBITDA for the second quarter of $137.9 million, a 61 percent increase over the prior year’s second-quarter adjusted EBITDA(a) and representing an EBITDA margin of 52.9 percent
    • Revenue efficiency of 97.1 percent for the second quarter yielded revenue of $260.8 million, a 48 percent increase over the prior year’s second-quarter revenue
    • Cash flow from operations for the six months ended June 30, 2014, reached $223.4 million, a 110 percent increase over the prior year’s cash flow from operations for the comparable period
    7 Aug, 02:50 AM Reply Like
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