Citigroup downgraded offshore oil drilling companies Diamond Offshore (DO), Noble Corp. (NE), and Transocean (RIG) in a note to investors earlier today, citing pricing pressure. WHAT'S NEW: In recent days there has been more evidence that offshore oil drillers are experiencing pricing pressure, Citigroup analyst Robin Shoemaker wrote in a note to investors. Reports by Ensco (ESV), another company in the sector, and Transocean suggest that rates for some drilling ships are set to fall broadly, the analyst stated. Moreover, while drilling contractors previously had the upper hand in negotiations with their customers, the balance of power has shifted recently so that customers are now in control, Shoemaker reported. She downgraded her ratings on Diamond Offshore (DO) and Transocean (RIG) to Sell from Neutral and lowered her rating on Noble Corporation (NE) to Neutral from Buy. However, she kept Buy ratings on Rowan (RDC) and Ensco. OTHERS TO WATCH: Other offshore oil drilling companies include Seadrill (SDRL), Hercules Offshore (HERO), and Vantage Drilling (VTG). PRICE ACTION: In early trading, Diamond Offshore, Transocean, Noble Corp., and Ensco were little changed in the up market, while Rowan gained 1.3% to $33.40.
I'm glad to see Citi agrees with me that ESV is the best of breed to survive a downturn in the offshore drilling market. I don't think its over yet. Your just starting to see analysts starting to downgrade the sector and companies. I still see them slashing earnings estimates for next year. I have been a buyer but I'm spacing my buys very far apart to be safe. I think the most dangerous of them all is SDRL. It has a mountain of debt and as margin get compressed that dividend will have to be slashed. Could probably see this as early at Q1 of 2014.
The good news to me is that the analysts are always to late with downgrades and upgrades. I do the opposite of what they say and make money most of the time. They take long lunches and drink to much. Then they go on vacation and make old news mistakes. Their all a gang of buffoons.
It is a total overreaction. Ensco lowered the price on its 8503 rig from $550K per day to $495-530K per day. Sure this isn't the best news, but this just puts the price in line with what Ensco is getting for the rest of the 8500 series of $480K/day to $530K/day. Cobalt was paying $550K/day but that was an anomaly. A similar price reduction was offered by Transocean and Wall Street is freaking out.
Ensco has many the best rigs out there at reasonable prices. Any price reductions will hit the competitors more than ESV. The Pemex deal announced this week will lead to huge growth in Gulf of Mexico. Pemex uses rigs from 17 different companies and has rated Ensco as its #1 driller in terms of performance and satisfaction. This a big source of growth for Ensco.
The new rigs that are coming online will add almost $3 per share to earnings by 2016. Look at the long term chart of ESV and you will see a nice uptrend.
Tudor,Pickering, Holt doesn't think it's the end of the cycle at all. They have been the most clear headed non-panicky commentators for years on the group. In fact, they think ESV is worth $75/share which is 10 x their 2014 estimates. They think the weakness is isolated to certain areas and even in those areas they think that it is a mild weakness off of a couple of years of pricing strength. They see the weakness in midwater floaters which is only 17% of ESV's fleet according to them, and also weakness in older legacy rigs. They see offsetting strength in other areas. They actually predicted 9 days ago that we would see analysts turn negative and said that would be a buying opportunity. They like ESV best also by the way and also seemed to endorse a policy of accumulating slowly over the next month or so as the analysts take minor weak news and and turn it into gale-force headwinds.