This article is inspired by comments to my previous article on Transocean (NYSE:RIG), titled "This Key Comment From Transocean Was Unnoticed By Investors." In the article, we started a discussion on a very fundamental issue: Is there a future for deepwater production? If the answer to this question is "no," then deepwater specialists like Transocean and Diamond Offshore (DO) should be avoided, or even shorted after each major rally.
Why deepwater drillers might be in terminal decline
Here, I will try to formulate the most common arguments against any future perspectives for deepwater production.
Electric vehicles (EVs) are a hot topic now, so let's start with them. The theory goes that soon the auto market will be dominated by EVs, which will dramatically decrease the demand for oil. Making things even worse, the auto market will switch to robo-cars that don't need humans at the wheel.
In a logical step forward, several leading companies will accumulate fleets of these vehicles, providing them on demand for passengers (transportation-as-a-service). This will increase efficiency and further decrease the demand for vehicles. No one except die-hard car fans will own a car anymore. Oil prices will drop through the floor, and no one will need deepwater production anymore.
The second blow comes from shale. Shale will grow and replace deepwater. Due to its short-cycle nature, shale will easily beat deepwater in a battle for investment dollars. Also, shale oil is not limited to the U.S., so you can expect production growth elsewhere. No major oil company will invest in deepwater anymore, as all the money will be going to shale.
The third blow is a push toward renewables. Solar, wind, etc. will take over oil's market share. Once again, deepwater is at the higher end of the cost curve, so it will fall first.
