Shares of offshore drillers have been sinking, but Citigroup is calling a bottom, at least for Transocean (RIG +1.4%), which the firm upgrades to Neutral from Sell.
The firm believes the fall in deepwater rig rates amid a softening of rig demand in 2014 will transition to stability and eventual recovery over the next 12 months; against a backdrop of strong oil prices and improving economic conditions, along with the large inventory of deepwater oil discoveries awaiting development, the firm thinks the current pain in the rig market will be short lived.
Drillers likely will be forced to settle for short-term contracts at dayrates of $400K-$450K for rigs that once commanded $600K, the firm says, but RIG shares should be able shrug off the bad news, as they did yesterday.
Other offshore drillers also are higher: DO +1.1%, NE +1.6%, ESV +1.2%, ATW +1.6%, SDRL +2.1%, HERO +2.4%, RDC +1.2%.
Recent bearish views on offshore drillers are forgotten for at least a day, as Diamond Offshore's (DO +2%) solid Q4 earnings and revenue beats help lift the entire sector.
Cowen analysts especially like DO's increased dayrates: Q4 ultra-deepwater average dayrates rose to $350K/day from $284K, deepwater dayrates increased to $402K/day from $380K, and mid-water floater rates rose to $277K/day from $258K.
However, Wunderlich notes that while the contracts and extensions are a positive, the low duration of the contracts may be the new norm for many of DO’s older lower specification rigs, which will translate to a lower backlog and less revenue visibility.
Bearish talk about offshore drillers has abounded recently (I, II, III, IV), and Atwood Oceanics (ATW) latest quarterly results won’t ease those concerns, Morgan Stanley says.
The firm is now modeling a rollover at $400K/day on ATW’s next rig to rollover in Equatorial Guinea in Aug. 2014, down substantially from the rig’s current dayrate of $516K/day (fixed in July 2013), as it sees increased competition in securing new work.
ATW does remain positioned to deliver steady earnings growth, the firm says, and beyond well-documented near-term floater market choppiness it still forecasts marketed utilization to pick up in 2015.
ATW (-2.1%) results pulled down other offshore players: HERO -7.9%, DO -3.2%, NE -2%, RIG -1.9%, SDRL -1.8%, ESV -1.6%, RDC -0.9%.
Raymond James maintains its bearish stance on offshore drillers and cuts its estimated 2015 sector EPS by ~18% while noting that this a typical cyclical slowdown and not permanent.
The firm estimates the industry needs to cold stack ~6% of both the floater and jackup fleet over the next three years to maintain 90% utilization; assuming the pace of newbuilds slows, this should improve the supply/demand dynamics by 2017.
Rowan Cos. (RDC +0.2%) earns an upgrade to Outperform, joining Pacific Drilling (PACD -1.9%) and Ocean Rig UDW (ORIG -2.1%) as drillers who would rank atop the list of any would-be acquirer given the high spec nature of the fleets.
Atwood Oceanics (ATW -4.1%), Ensco (ESV -2.4%) and Noble Corp. (NE -0.3%) are downgraded to Market Perform, as offshore stocks are in “full-blown meltdown mode."
The firm maintains Transocean (RIG -1.9%), Diamond Offshore (DO -1.6%) and Hercules Offshore (HERO +0.4%) at Market Perform, noting that “lower quality assets are too risky as we head into a sloppy market."
Hercules Offshore (HERO +4.9%) is recovering a bit of yesterday's 15% loss, but the firm - which also cut shares to Market Perform - says it was spooked by HERO’s decision to abort the planned reactivation of a Gulf of Mexico jackup, showing management's concern about the strength and depth of HERO's most important cash-flow generating market.
The pace of customer spending growth is expected to be lower this year compared with last year, NE says in its earnings call, and that's with 38 ultra-deepwater rigs around the world looking for work vs. 22 a year ago.
The market for shallow-water rigs also looks wobbly, as Hercules Offshore (HERO -16.3%) said yesterday in a fleet status report that it suspended plans to reactivate a shallow-water rig in the Gulf of Mexico.
Hercules Offshore (HERO -14.1%) plunges after Global Hunter downgrades shares to Neutral from Buy and lowers its target price to $6 from $12 after HERO released its monthly fleet status report.
The firm says it failed to see any of the three key items it was looking for in the report: meaningful contracts for the Discovery rigs; a tick higher in Gulf of Mexico dayrates; and Pemex recontracting several of the legacy jackups set to roll in 2014, indicating to the market that its newbuild awards are not solely replacement rigs but rather incremental.
Oil services analysts at Deutsche Bank are very positive on the sector for next year, despite pervasive fears of weakening U.S. oil prices.
Baker Hughes (BHI), Halliburton (HAL), Hercules Offshore (HERO) and Nabors Industries (NBR) are the firm's highest conviction choices and include price targets much higher than consensus; NBR's $27 target is the highest on Wall Street and would represent a 60% gain from current levels.
The firm also sees strong upside potential in Patterson-UTI Energy (PTEN), Pioneer Energy Services (PES) and Schlumberger (SLB).