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Why Offshore Drilling Stocks Are Soaring Today

Matthew DiLallo, The Motley Fool

What happened

Shares of several offshore drilling stocks surged on Tuesday. Among the leaders were Diamond Offshore Drilling (NYSE: DO), Noble Corporation (NYSE: NE), Transocean (NYSE: RIG), and Ensco Rowan (NYSE: ESV), which all rallied more than 10% by 3:00 p.m. EDT on Tuesday. Fueling the surge in these stocks was a combination of higher oil prices and Transocean's better-than-expected second-quarter results.

So what

Oil prices popped 2% on the day as traders started growing bullish that the Federal Reserve would cut interest rates. That move, in their view, will help jump-start the economy, which would drive up demand for oil.

That oil price rally sent the shares of several oil and gas producers soaring, since those higher prices would positively impact their cash flows. Offshore drillers joined that rally on the view that improving oil prices and demand will lead producers to boost their spending on offshore drilling projects.

The silhouette of an offshore drilling rig at sunset.

Image source: Getty Images.

The other catalyst driving up offshore drilling stocks today was Transocean's second-quarter results. While the industry leader posted an adjusted net loss of $0.34 per share -- which met analysts' expectations -- its underlying results showed signs of improvement. The company's average daily revenue per rig rose 3%, while it hauled in $153 million of cash during the quarter. That was roughly $100 million more than it brought in during the first quarter thanks to an increase in customer collections.

The company also made some positive comments on the offshore drilling market. CEO Jeremy Thigpen stated in the earnings release that "Despite some continued uncertainty around oil prices, offshore project economics remain compelling, driving increases in floater contracting and increasing dayrates in both the harsh environment and ultra-deepwater markets." Those comments bode well not only for Transocean's future but also for its peers.

Transocean's results also hint that the second quarter might have been better for the offshore drilling sector than investors expected. That's causing them to be increasingly optimistic about the upcoming earnings reports from Diamond Offshore, Noble, and Ensco Rowan. Investors won't have to wait long for those reports. Noble and Ensco Rowan expect to report their results on Thursday, while Diamond Offshore Drilling should post its numbers next Monday.

Now what

While oil prices have bounced around quite a bit, they're high enough now to incentivize oil companies to increase their spending on offshore drilling projects. Because of that, the long-awaited offshore drilling recovery has finally arrived, which was noticeable in Transocean's second-quarter results. That trend could become even more pronounced if the oil market continues getting better, which might happen more quickly if the Federal Reserve cuts interest rates.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.