Rough Year Offshore

J. MARSHALL ADKINS, Raymond James (10/11/2010)
"It has been a rough year for the offshore drilling stocks due to the fallout from the April Macondo accident in the Gulf of Mexico. While the broader markets (DJIA, SPX) and oil service indexes (OSX) are roughly flat year-to-date, the offshore drilling group is down, on average, over 15%. So, has this pull-back created a buying opportunity in offshore drilling stocks? In today's update, we tackle this question by analyzing the potential timing of a recovery in various segments of the offshore drilling sector. The bottom line is that the timing and magnitude of the offshore drilling recovery will be more asset-specific than any cyclical offshore driller upswing in the past few decades. While valuations are attractive for those with long-term horizons, we think this offshore recovery will generally take longer than many think. That means offshore drilling investors should focus on international-driven jackups, particularly higher-spec, for the short term and leave the floaters to those with much longer-term horizons.

The main reason for our near-term pessimism is that it appears the current offshore U.S. deepwater moratorium is likely to morph into an "Obamatorium" where the drilling moratorium is technically lifted but drilling does not rebound due to Obama administration-directed permitting delays. Additionally, ongoing deliveries of (pre-meltdown ordered) rig new-builds mean that offshore drilling capacity is likely to increase in an already oversupplied market."

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