Seeking Alpha

Time to sell drillers as Petrobras cuts rig rates, analyst says

  • Petrobras (NYSE:PBR) plans to spend ~$154B during 2014-18 on Brazil's offshore pre-salt fields, but a budget increase of 4.9% from the 2013-17 budget - considering that budgets for 2012, 2013 and 2014 rose by a respective 8.7%, 13.3% and 10.8% - is a disappointment for U.S. companies operating there, analyst Lenny Zephirin says.
  • The "monster rate" of $680K/day is coming to an end, as dayrates in Brazil fall in-line with PBR's capex budget, Zaephirin says, foreseeing rates in the mid-to-high $500K/day range for younger ultra-deepwater rigs and from $250K/day to the mid-$400K/day for older rigs, which depend heavily on rig specifications and contract length.
  • The analyst has Sell ratings for Seadrill (NYSE:SDRL), Ensco (NYSE:ESV), Diamond Offshore (NYSE:DO) and Transocean (NYSE:RIG) - four of the top five companies with the highest backlogs working for Petrobras.
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Comments (66)
  • jzut
    , contributor
    Comments (56) | Send Message
     
    3:17PM. ESV updates fleet status and they go up. Read this one and who do we believe?????
    19 Aug, 06:18 PM Reply Like
  • petroglyph
    , contributor
    Comments (35) | Send Message
     
    Yeah, a forward multiple of about 9. A fat and sustainable dividend. I'm not sure how that makes ESV a "sell". This is a very late call, IMO.
    19 Aug, 07:01 PM Reply Like
  • Purple_K
    , contributor
    Comments (468) | Send Message
     
    Believe this guy, 2 years from now when he upgrades $RIG to a Buy at 54
    19 Aug, 08:43 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2730) | Send Message
     
    ESV went up a bit more this morning, despite this news.
    20 Aug, 11:10 AM Reply Like
  • 7612841
    , contributor
    Comments (52) | Send Message
     
    who the frick is petrobras, and why do they matter?????????????
    19 Aug, 06:23 PM Reply Like
  • MRL1983
    , contributor
    Comments (62) | Send Message
     
    Is this a serious question???? They are one of the largest oil companies on earth, considered an oil major. I would say that fact alone means they matter.
    20 Aug, 12:54 PM Reply Like
  • wigit5
    , contributor
    Comments (4101) | Send Message
     
    I laughed a bit too MRL the fact that this guy has never heard of Petro tells us he isn't yet ready to invest in the oil sector.
    20 Aug, 01:04 PM Reply Like
  • Purple_K
    , contributor
    Comments (468) | Send Message
     
    You've got to assume he's trolling. It takes less time to google the name than it does to write the reply.

     

    10/10 sir
    20 Aug, 06:07 PM Reply Like
  • wigit5
    , contributor
    Comments (4101) | Send Message
     
    Petrobas is one of the largest oil co's in south america if i'm not mistaken... that being said the "analysts" sell rating on these companies for the last 6 months has really worked in their favor....
    19 Aug, 06:31 PM Reply Like
  • imbigt
    , contributor
    Comments (13) | Send Message
     
    Ya....Like deep water drilling will no longer be needed...
    I'll take my chances (and my 11% divy, and hold my SDRL)
    19 Aug, 06:43 PM Reply Like
  • gennocro
    , contributor
    Comments (65) | Send Message
     
    wigit5
    I assume from your comments that this measure was designed to pull down day rates??? My first order of business is to see how much impact this will have on SDRL since it is a small portion of the overall pie. As soon as this was published SDRL immediately dropped after hours.
    19 Aug, 06:43 PM Reply Like
  • wigit5
    , contributor
    Comments (4101) | Send Message
     
    I don't know anything about that gennocro, I just know that owning $SDRL has been profitable for me... even if only in dividends alone. I don't think this is a reason to sell SDRL either. Newer rigs will command healthy dayrates in the near term and once contracted (as most of SDRL's are) the fluctuation in dayrates won't matter much as far as I know.
    19 Aug, 06:49 PM Reply Like
  • MisterEC
    , contributor
    Comments (42) | Send Message
     
    I see only 600 shares sold, at big discount. Odd lots, means nothing.
    20 Aug, 05:31 AM Reply Like
  • garyreynolds.rdg
    , contributor
    Comments (35) | Send Message
     
    That is the purpose of a lot of these post: create a small volatility trading opportunity! Longer term the deep water drillers will appreciate and the dividends will continue even if they are reduced some to free up more cash.
    20 Aug, 08:59 AM Reply Like
  • oskar96
    , contributor
    Comments (96) | Send Message
     
    No problem as Mexico opened up deep water drilling. Lots of money to be made for drillers.

     

    analyst dont know nuttin sometimes
    19 Aug, 06:44 PM Reply Like
  • Mad Stacks
    , contributor
    Comments (446) | Send Message
     
    The rest of the drillers that aren't working for PBR still get to split 100% of nothing.
    19 Aug, 06:50 PM Reply Like
  • jtighe65
    , contributor
    Comments (32) | Send Message
     
    And who is the unnamed analyst? Obviously doesn't follow the business.
    19 Aug, 06:54 PM Reply Like
  • Mad Stacks
    , contributor
    Comments (446) | Send Message
     
    The analyst's name is Longdley “Lenny” Zephirin. Sorry, but I can't trust a guy named Longdley. http://bit.ly/1oP5lbV
    19 Aug, 07:03 PM Reply Like
  • sayid
    , contributor
    Comments (4) | Send Message
     
    written by Dimitra DeFotis. she is a journalist rather than analyst.
    19 Aug, 07:37 PM Reply Like
  • JDoe20
    , contributor
    Comments (430) | Send Message
     
    He got his name from a girl friend hoping to make him feel better or . . . Londley!
    19 Aug, 09:35 PM Reply Like
  • defunkdreader
    , contributor
    Comments (59) | Send Message
     
    Slow news week so Barrons publishes out-of-date research?

     

    Zephirin is most likely correct in his day-rate forecast, but has completely missed the boat on stock pricing and the expectation game. The stocks have already adjusted to this with RIG and DO at all-time lows.
    19 Aug, 06:55 PM Reply Like
  • D20
    , contributor
    Comment (1) | Send Message
     
    PBR can be taken over by the govt at anytime
    19 Aug, 07:36 PM Reply Like
  • PVFederico
    , contributor
    Comments (210) | Send Message
     
    The government of Brazil already owns 54% of PBR.
    19 Aug, 10:57 PM Reply Like
  • rspeer
    , contributor
    Comments (3) | Send Message
     
    Another opportunity to add to my long term sdrl position. PBR is huge but does not control the entire market by any stretch. My view is that we"ll see the newest, safest, most technologically advanced rigs go to those who will pay and PBR will get what they can within their budget.
    19 Aug, 07:36 PM Reply Like
  • The Rebel
    , contributor
    Comments (817) | Send Message
     
    Exactly right! I would be a seller of PBR based on this news.
    19 Aug, 07:38 PM Reply Like
  • FadeToBlack
    , contributor
    Comments (102) | Send Message
     
    Long SDRL at 32 and some pocket change, not going anywhere.
    19 Aug, 07:36 PM Reply Like
  • crosleycapital
    , contributor
    Comments (5) | Send Message
     
    Old news. The author did not do his homework properly, or tries to talk down the stocks.

     

    Below is a transcript from Transocean,s investore presentation.
    Judge for yourself.

     

    Worldwide jack-up utilization is currently at 86%, down from 89% at our last call. After a steady 3-year increase, we believe the market has reached an inflection point in global utilization. With influx of new supply, we're seeing downward pressure on both day rates and length of term in some operating regions…"

     

    … Worldwide jack-up utilization is currently at 86%, down from 89% at our last call. After a steady 3-year increase, we believe the market has reached an inflection point in global utilization. With influx of new supply, we're seeing downward pressure on both day rates and length of term in some operating regions…"
    19 Aug, 07:37 PM Reply Like
  • sayid
    , contributor
    Comments (4) | Send Message
     
    i only see a slower increase of pbr budget. How analyst got conclusion that the rig day rates gonna cuts? it can only give me a sign of flat day rate at most. Analyst is trying to exaggerate bad side of the situation.
    19 Aug, 07:37 PM Reply Like
  • mrichsq
    , contributor
    Comments (2) | Send Message
     
    Petrobras is "petroleum Brasilia" and they are a big big player.
    Even though I recently sold both SDRL ( and SFL) I believe that even IF (big IF) day rates get cut to mid to upper 500Ks SDRL will still be OK. I had concerns regarding their debt and management.
    19 Aug, 07:38 PM Reply Like
  • user 18159032
    , contributor
    Comments (582) | Send Message
     
    Ah, PBR, my favorite adult beverage, going to cut rates are they? Just like every other producer they are going to try. Duh. Imagine the headline, PBR going quit bargaining with drillers and is giving away the house. PBR is going to pay as little as the market will allow and SDRL is going to charge as much as the market will bare. PBR is going to bargain hard but the market will determine the price. The premise of the piece is pure BS. Think about it for about 5 minutes.
    19 Aug, 07:54 PM Reply Like
  • habear
    , contributor
    Comments (21) | Send Message
     
    just re-entered ESV after taking a nice profit. if it drops more, I'll buy more. viva la Mexico!
    19 Aug, 08:48 PM Reply Like
  • nuahw
    , contributor
    Comments (148) | Send Message
     
    la?????
    29 Aug, 08:48 AM Reply Like
  • mike grace
    , contributor
    Comments (19) | Send Message
     
    Im staying put.

     

    Disclosure : Long SDRL
    19 Aug, 09:11 PM Reply Like
  • long_on_oil
    , contributor
    Comments (1143) | Send Message
     
    PBR may try to set the rate but if another company offers a higher rate for the rig PBR will have to pay or do without. If the supply exceeds the demand the customer may be able to set the rate but if the demand exceeds the supply, the drilling companies will set the rates.
    I refuse to pay $2 for a Coke so Coke will have to lower their price to $1.50 and that is the bottom line. Coke would tell me to buy a smaller size or do without and the same thing will happen to PBR.
    19 Aug, 09:12 PM Reply Like
  • thomasmosnes
    , contributor
    Comments (5) | Send Message
     
    PBR put contract re-negotiations on hold with Diamond, Seadrill and other contractors in recent months, following negative trends in charter rates, utilization, and fear of oversupply during 1H14. The negotiations from late 2013/early 2014 were at rates far above present market. As such, Petrobras laid the talks to rest with the drilling contractors over the summer, in order to re-submit the requirement and accept bids that reflect today's market. It's not that Petrobras SET the rates, they merely have leverage to push the rates down, as all drillers are facing increasing challenges going forward.

     

    Similar drops in charter rates are evident in Mexico, where PEMEX in 2013 signed up a semi for at ~210K/day, while in early 2014, PEMEX hired a similar, nearly identical rig for ~170K/day.
    20 Aug, 12:25 PM Reply Like
  • JDoe20
    , contributor
    Comments (430) | Send Message
     
    McDonalds says they will only pay $2 / lb for ground beef. I think I'll wait and get mine at that price too . . . . what a waste of an analyst time!

     

    Glad I sold my PBR (but still drinking them).
    19 Aug, 09:32 PM Reply Like
  • Mcnutt815
    , contributor
    Comment (1) | Send Message
     
    My broker was strong on RIG, and following the past 2-month bloodbath I kept RIG, but not the broker. I like SDRL with in-hand contracts into 2015, but debt is a concern. If they have a Horizon incident they could be in a real bind. I love the dog pile for sell. Share prices will fall and I can buy more shares at very low prices diluting my entry cost. Go long and enjoy dividends. Both will be in business for a long time since everyone uses oil in some manner.
    19 Aug, 09:48 PM Reply Like
  • Ernie Mac
    , contributor
    Comments (943) | Send Message
     
    Unless Brazil has suddenly developed true fiscal discipline, I doubt it will keep the increase to only 4.9% over 2014-2018 given how important discovering and producing more offshore oil is to its economy. Even if it did, that cutback in the rate of growth probably would be the equivalent of less than a 1% decrease in the rate of growth of demand for offshore rigs.
    19 Aug, 09:48 PM Reply Like
  • moseslarsen
    , contributor
    Comments (402) | Send Message
     
    Div yld + balance sheet = ESV. I will stay long, thank you very much.

     

    Analyst/journalist attempt to push names down so they can set up nice positions...we may have a bit further to come down in the near term, but these names aren't going anywhere. Noise noise noise...wish I had more free cash to load up further. I would have to sell my 25% win in NOV to buy more! Regards, Moses
    19 Aug, 10:08 PM Reply Like
  • go-4-it
    , contributor
    Comments (669) | Send Message
     
    pure crapola from another silent "analyst". geez it never stops. If you are an investor and listen to these clowns, you will never make money. Pumpers and dumpers is their game, and they get paid to spew out garbage. If you believe this latest attack, then you deserve to lose.
    19 Aug, 11:12 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (2333) | Send Message
     
    These types of NR's should be put together and released as 'The Least Worst of Useless Articles'...

     

    ....except that would be a lie....b/c...

     

    ....some of them ARE THE WORST ; )
    19 Aug, 11:14 PM Reply Like
  • caupachow
    , contributor
    Comments (394) | Send Message
     
    Long on RIG, hopefully drops some more so I can what I've been doing for the last two months. Buying RIG
    19 Aug, 11:56 PM Reply Like
  • mapodga
    , contributor
    Comments (2991) | Send Message
     
    Problem is that if this news is true this could have serious influence on the utilization and profit (and dividend) of independent Drilling companies, since Petrobras was probably biggest and best costumer.

     

    Others (Mainly majors) cut their spending in offshore drilling some time ago, since they pushing to fracking in US.

     

    We will see soon.
    20 Aug, 07:35 AM Reply Like
  • 2839298249
    , contributor
    Comments (268) | Send Message
     
    mopodga: you need to learn about the business before you speak. No majors in their right minds would give up on deepwater and allocate that spending towards fracking tight sands. Study decline rates on fracked wells vs deepwater. How about production rates on fracked wells vs deepwater. Please do some homework.
    20 Aug, 12:51 PM Reply Like
  • mapodga
    , contributor
    Comments (2991) | Send Message
     
    Yes sir, 28....

     

    I will go directly to the book-store now and learn till you would give me positive grade :)
    Meanwhile, you should promise me that you will learn a little more about American fracking industry and major players there. And yes they have also high costs with fracking, but strategy is strategy and desertification of resources is desertification of resources and obviously this count a lot for exxon,chevron and co.,

     

    I would also like that would oil major give more money for offsore's, but sorry this is currently not the case.
    20 Aug, 05:53 PM Reply Like
  • eapss
    , contributor
    Comments (42) | Send Message
     
    Is Barron's relevant any longer? Of late they have seemed increasingly lame. Just my perception .
    20 Aug, 09:01 AM Reply Like
  • Chris Lau
    , contributor
    Comments (1864) | Send Message
     
    Barron's still pays Yahoo finance. They're still on Yahoo finance, so no, they're no longer relevant.

     

    (NYSE:RIG) (NYSE:SDRL) (NYSE:ESV) is a gift for long investors looking to buy into deep sea drilling at a big discount. Get paid to wait.
    20 Aug, 11:06 AM Reply Like
  • Purple_K
    , contributor
    Comments (468) | Send Message
     
    Thoughts on $NE? Been accumulating from 26.5---> here, I feel like a leaner more focused co. after divesting $PGN junk.
    20 Aug, 11:09 AM Reply Like
  • 2839298249
    , contributor
    Comments (268) | Send Message
     
    Purple: I agree with you. Fleet is young. A lot of term contracts locked up with Shell. Much better focus. Glad they dumped the junk.
    20 Aug, 12:47 PM Reply Like
  • AZVIEJO
    , contributor
    Comments (45) | Send Message
     
    Don't know who this Ben Levisohn is who writes the articles for Barron's but, I stopped looking at the articles several months ago because they were old news and many times inaccurate. Waste of time.
    20 Aug, 11:38 AM Reply Like
  • AZVIEJO
    , contributor
    Comments (45) | Send Message
     
    Don't know who this Ben Levisohn is who writes the articles for Barron's but, I stopped looking at the articles several months ago because they were old news and many times inaccurate. Waste of time.
    20 Aug, 11:38 AM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    Petrobras 5 year plan page 51/55 shows that 70% of $220 billion capex will be directed to E&P. Up from 62% in the last 5 yr plan adjustment. Downstream is modeled to decline to 18% from 27% with other remaining at 12%. Exactly where is the consequence this guy points out? If anything far more total $ will be spent on E&P than in the past. Cost control is always an issue for PBR and history shows that they do not pay the most favorable rates anyway. I don't see this guys projection at all. Tell me where I am wrong. Zepherin doesn't even mention that SDRL is highly likely to make up any lost work or reduced rates from PBR with
    Rosneft work now being contracted. PBR's major focus in the 5 year plan is development of the enormous offshore reserves. Still and for many years going forward there is a lot of business in Brasil. PBR may not be the best client but you can still make a good return from that work and they will still need rigs for many years. I totally disagree with Zepherin's conclusions almost to the point of saying he did lousy research.
    20 Aug, 11:56 AM Reply Like
  • 2839298249
    , contributor
    Comments (268) | Send Message
     
    PBR needs every deepwater rig they can afford right now. My one concern is that they drive a hard bargain in negotiations and we'll see lower rates in the next round of renewals. Not a disaster. +/-2 rigs I expect Brazil to utilize the same number of rigs next year as they used last year. Further into the future I would expect the overall number to climb.

     

    Generally the "analysts" are just a bunch of lemmings.

     

    I also don't think every rig PBR will contract will be 6 or 7th generation. You may see some 4-5th gen rigs get signed.
    20 Aug, 12:59 PM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    Actually the spending projection for 2014 to 2018 is for an increase of 8%. That is the largest increase shown in the past 5 years in the 5 year forecasts. So where is the decrease in drilling investment?
    20 Aug, 12:24 PM Reply Like
  • user 18159032
    , contributor
    Comments (582) | Send Message
     
    I agree Saratoga, there is a big difference in wanting to cut rates and being able to cut rates. I imagine that every producer is working for the lowest rate it can get, just as the driller is trying for the highest. Unless we are talking about a significant quantitative reduction in total E&P it doesn't seem like there is much to discuss. In this case it seems like like the writer is mistaking desire with ablity, a distinction that is easily recognized at my age.
    20 Aug, 12:34 PM Reply Like
  • 2839298249
    , contributor
    Comments (268) | Send Message
     
    Two questions: 1. Who is Lead Zepherin?
    2. Does anyone still read Barron's?
    20 Aug, 01:01 PM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    I don't know what information he used but one can see the PBR rates in the fleet reports of the major drillers. The so called monster rates have never been the norm in Brasil. I see the bigger impact from the eventual buildout of the Sete fleet. however, Sete is way behind on schedule and that fleet buildout can't happen until the mid-2020s at best. So in the meantime PBR will still need rigs from the majors. However, I don't really see Brasil as the growth area now. Pemex is coming back in the game. Rosneft will drive the Arctic development. Offshore Africa is the only serious hope for energy development on that continent for the foreseeable future. Asia is predominantly offshore. Major finds in the Levant Basin and political unrest in the middleeast make offshore more palatable than onshore unless you really like ISIS. I can do dozens more of these. Just look at where the elephant finds have been in the last 20 years. Mainly offshore. Eventually the majors will gear back up to go to where the big oil is. OFFSHORE.
    20 Aug, 01:23 PM Reply Like
  • SeekingAlphaReader
    , contributor
    Comments (61) | Send Message
     
    Any idea on how many newbuilds the Mexican side of GoM will need due to the new oil and gas laws?
    21 Aug, 02:14 PM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    Lets look for a moment at SDRL and the potential PBR impacts. Only 2 rigs have contracts expiring in 2015. 2 in 2016 and 1 in 2018. I would argue that this means that SDRL effectively has no exposure to pricing issues in Brasil for the foreseeable future. Plenty of time for SDRL to recontract West Taurus and West Eminence elsewhere if PBR chooses not to reup. If this is the best argument that Lenny can make than I am not in the slightest worried about PBR possible pricings for SDRL. PBR has also annouced major expansions in its offshore production needs to meet the 5 year plan. So major increases in production still require the equipment to get it out of the ground (under water). SDRL currently has lockins on the rates for the 5 contracted rigs. I sure don't see any worries for my investing strategy here. Further I have seen nothing directly from PBR capping drill rig day rates. Yes, they have always been difficult in contracting day rates but that has not been a major issue for SDRL and does not appear to be an issue going forward. I will look at the other drillers as well and comment separately.

     

    Also, I briefly reviewed the Zephirin Group's recommendations and note that they have set a $46 price target for RIG. Well above its current market price at $39+.
    21 Aug, 11:01 AM Reply Like
  • wigit5
    , contributor
    Comments (4101) | Send Message
     
    great analysis saratogahawk
    21 Aug, 11:11 AM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    Further on SDRL. West Eminence is a 6th gen HE and will be retargeted to the Kara Sea for Rosneft when its PBR contract expires.
    21 Aug, 11:13 AM Reply Like
  • Mad Stacks
    , contributor
    Comments (446) | Send Message
     
    Saratogahawk typically seems to have better driller insight than the average Contributor. Thank you for your input and please consider becoming a Contributor so I don't feel compelled to Paypal you a penny every time you post ;) I'm long with SDRL regardless of internet chatter, but it's nice to have reassurance from people who actually know the industry.
    21 Aug, 03:07 PM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    Mad Stacks not me seeing a penny from contributing on here. Lots of work and distracts from my business but I feel that I have something to contribute. Not really interested in doing the author thing for SA. Too much grief from other guys like me. I just hope to add a little something useful to topics that I have some knowledge about. Thanks for your thoughts.
    21 Aug, 05:28 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (2333) | Send Message
     
    Agree with Mad Stacks, saratogahawk. I don't always agree with you, but I've learned a $hitload reading some of your posts and it's made me a better investor.

     

    Thank you.
    22 Aug, 12:03 AM Reply Like
  • saratogahawk
    , contributor
    Comments (1976) | Send Message
     
    So with the new NADl/SDRl/Rosneft deal NADL picks up 150 land based drilling rigs and the assorted support systems. As I've previously noted this portion of northern Russia is rich with hydrocarbon potential. The landbased and seabased rigs make NADL/SDRL the dominant harsh environment drilling company. I have NADL as my No. 1 growth stock going forward. I don't see this weakness in the offshore market affecting NADL at all. Also, I see SDRL dropping down West Eminence to NADL as well as several other rigs as the Rosneft deal is revealed in its fuller potential. I see several more than the 9 rigs previously discussed. The recent shipping of oil from Novy Port by Gazprom shows that infrastructure is coming into place in the Kara and Barents to support a full-out drilling effort in the Arctic.
    22 Aug, 09:59 AM Reply Like
  • DividendInvestorLA
    , contributor
    Comments (3549) | Send Message
     
    This is yet another time where I can can only laugh at the analysts. Where was this analyst before oil driller prices went down? He downgrades them now?!!!! What a joke.

     

    to me that means the time to buy may be here (bought some ORIG).
    23 Aug, 07:37 PM Reply Like
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