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3 Stocks to Focus on Path to Offshore Drilling Recovery

Nilanjan Choudhury

Increases in new project opportunities are expected to reverse four years of decline in offshore drilling contractor revenues, a new report from the independent energy research and business intelligence company Rystad Energy shows. With the energy sector emerging from the crude slump and debt-driven overhaul, renewed interest in the offshore drilling space is finally raising hopes for the industry’s recovery.

Oil Price Collapse Hurt Offshore Industry

If there's one thing the commodity price crash has taught oil and gas companies, it's capital discipline. The 2014-16 collapse in oil prices, which saw crude fall to a 13-year low of around $26 per barrel, forced energy executives to consider a new approach to capital deployment.

When oil was in the triple-digit territories of 2014, companies had billions of dollars in exploration budgets. The aggressive approach was essentially tied to commodity prices and severely dented balance sheets when prices hit rock-bottom in 2016. With operating profitability compromised, the worst oil crash in over half a century triggered major restructuring and a change in the companies’ long-term focus. Most producers concentrated on becoming leaner by shunning large, capital intensive projects.

In particular, the price slump forced the top energy companies to cut spending on the costly offshore drilling projects due to lower profit margins. This, in turn, meant less work for the beleaguered drillers. With old contracts rolling off, the companies either got rigs stacked or bore high reactivation costs and accepted much-reduced dayrates. As a result, overall revenues were impacted.

Promising Outlook for 2019

Steadiness of oil prices at the current levels is driving operators to make longer-term plans, as deepwater projects become cost effective. This could increase demand for offshore drilling services. Sector consolidation, adoption of superior technologies, new operational systems’ optimization of the fleet by strategic sell-offs and acquisition, seeking profitable collaborations, among other strategic strides, will certainly help boost future prospects of the drilling companies. While one does not expect the sunny days of the drilling industry to return immediately, signs of recovery can definitely be seen.

The U.S. offshore industry has been witnessing signs of revival since 2017, with new project sanctions growing steadily. Per Rystad Energy, oil and gas finders committed to 96 new offshore projects this year — up from 62 in 2017 and 43 in 2016. Despite the recent blip in oil prices, more than 100 new initiatives are expected to make the cut for 2019. Companies worldwide will spend a total of $210 billion on offshore oilfield services, with about $120 billion dedicated toward greenfield projects. This should revive the positive revenue growth trajectory, with sales improving modestly in 2019.

Operators think that the lessons learnt during the bust years will help them undertake sizeable expenditures, while maintaining the target capital structure. With the offshore players greatly reducing costs amid greater operating efficiencies, most of the projects are likely to generate decent returns even at today's oil prices.

Stocks in Focus

With the offshore energy industry looking ready to turn the corner toward growth, we have hand-picked a few stocks for you to monitor going into 2019.

Noble Corporation plc NE is an offshore contract drilling services provider with a fleet of 25 units. The London-based company, which carries a Zacks Rank #2 (Buy), has an expected revenue growth of 7.5% for the next year. 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Transocean Ltd. RIG, headquartered in Switzerland, is one of the world's largest offshore drilling contractors having 46 mobile units. The company has a Zacks Rank #3 (Hold) and its revenues are expected to grow 6% for 2019.

Ensco plc ESV is one of the leading providers of offshore contract drilling services to the global energy industry with a fleet of 56 units. The London-based company, which carries a Zacks Rank #3, has an expected revenue growth of 4.8% for the next year.

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