Why fleet growth matters
The number of fleets a company has correlates with the company’s market value in a normal market. The more fleets the company has, the more cash flow a company can generate. So, fleet growth is often a driver of revenue, earnings, cash flow, and share prices.
Seadrill expected to see the largest fleet growth
Transocean Ltd. (RIG), the largest offshore rig player in the world based on fleet size, recently illustrated the number of fleets under construction in its May presentation 2013 for itself and its peers. According to the slide, several companies were looking to expand their fleet counts by at least 5.0%, with Seadrill Ltd. (SDRL) expected to increase its fleet size by 50%, followed by Noble Corp. (NE) at 16.7%, and Diamond Offshore Inc. (DO) at 15.8%. Most of these companies are looking to expand their fleet portfolio in jackups and drillships, in the expectation that these two fleet classes will see the highest demand growth over the next few years.
Fleet growth to drive earnings higher
This would be most positive for Seadrill Ltd. (SDRL), followed by Noble Corp. (NE) and Diamond Offshore Inc. (DO), as large increases in fleet deliveries will drive revenue and earnings higher. While this may not sound very positive for the long-term prospects of Transocean Inc. (RIG) and Ensco Plc. (ESV), shares of the two companies could still increase due to margin expansion through higher utilization of their fleets. As long as supply doesn’t significantly outpace demand growth, shipping rates will stay at least at current rates. This would be positive for the industry overall, so the Market Vectors Oil Services ETF (OIH) and the iShares U.S. Oil Equipment & Services ETF (IEZ) would benefit as well.
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