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Morningstar | Lowering Offshore Driller FVEs on Weaker Pricing and Utilization Outlook

We are lowering our fair value estimates for offshore drillers, in the range of about 10%-20%. Our Transocean fair value estimates move to $6.50 per share from $8.25, Diamond to $10.50 from $12, Ensco to $3.75 from $4.40, Rowan to $10 from $11, and Noble to $2.50 from $2.90. The lower fair value estimates stem from decreases in our long-term floater rig demand forecasts, which lead to lower utilization and pricing forecasts for each of the drillers. Our no-moat ratings for each of the names are unchanged. We are increasing our uncertainty rating for Transocean, Diamond, and Rowan to very high from high previously, to reflect increased financial leverage at the lower fair values as well as increased uncertainty about future rig retirements.

We've decreased our floater rig demand forecasts in response to weaker-than-expected rig demand in 2018, in spite of very strong oil prices for most of the year. In particular, we've decreased o ur expectations for exploration rig demand (which accounted for around one half of floater demand prior to the post-2014 downturn), which we think will remain weak. For most classes of floater rigs, we think utilization will be bound in the 60%-70% range, which will in turn confine midcycle day rates to about one half of predownturn levels.

Among the group, we've lowered our fair value for Transocean the most in percentage terms. In particular, we've lowered our long-term pricing expectations for the company's harsh environment floaters. Although the harsh environment market is a relative bright spot in the offshore drilling market currently, we think further upside for harsh environment rigs is somewhat limited.