EUR 850.00 For Business Accounts Only

Morningstar | NE Updated Forecasts and Estimates from 15 Nov 2018

Offshore drillers Diamond, Ensco, Noble, and Transocean all reported generally flat second-quarter results, owing to stagnant offshore drilling market day rates and utilization levels, particularly in the deep-water-focused floater rig market, which accounts for the bulk of the companies’ revenue and operating income. Our fair value estimates and no-moat ratings are unchanged for now.

The chief exception to the flat results came from Transocean, which saw a 19% sequential revenue uplift and operating margins improve to 12% from 0%. This was due partly to the acquisition of Songa Offshore (and its highly profitable contract backlog) which closed midway through the first quarter, but also due to the successful startup of the newbuild Deepwater Poseidon drillship.

On a positive note, the four drillers announced a total of six floater rig retirements during the quarter. This puts the drillers slightly ahead of schedule for our expected 2018 retirements.

Still, in order to eventually push stronger pricing, we would need to see more post-fourth-generation (essentially built post-2000) floater rig retirements, which have been scarce thus far. There are about 200 of these rigs in the current fleet (not to mention the 30 or so rigs under construction), which exceeds our long-term floater rig count demand forecast of about 180. Furthermore, it’s unlikely that every pre-fifth-generation rig will eventually be retired. For example, five out of Diamond’s nine remaining pre-fifth-generation rigs have been contracted this year, and the company is adamant that these rigs remain viable.

Combined with a difficult rig supply picture, our bearish demand forecast creates a bleak overall picture for the offshore drillers. The average offshore driller looks about 60% overvalued to us. The rally in short-term oil prices over the past year has led to a renewal in investor optimism about the drillers. But with our long-term oil price forecast still at $55 a barrel West Texas Intermediate, we think demand will remain tepid with oil and gas companies preferring generally lower-cost U.S. shale to deep-water offshore.