Yet More Analysts Turn Negative on Offshore Drilling

At the end of last year, analysts at Citigroup put out a note to investors warning of a possible slowdown in the offshore drilling market. Usually, a view from one group of analysts is not enough to sway investor opinion. However, since the initial publication of this research, more analysts have turned negative on the sector and appear to be taking aim at some of the industry's most prolific names, including Seadrill , Transocean , and Diamond Offshore .

The negative comments from Citigroup have been supported by further comments from analysts at Barclays. In particular, Barclays analysts believe that the day rates for ultra-deepwater, or UDW, drilling units will drop by around 16%, to an average of $475,000 per day over the next few years. UBS analysts have also built on this case, with the firm's analysts suggesting that there could be a 12 to 18 month downturn ahead for the industry. Further, Raymond James analysts slashed expected 2015 sector earnings by 18%.

The reasoning behind this slew of downgrades? The market for jack-up drilling units is becoming oversupplied, and exploration and production spending is slowing while oil companies are seeking to reduce expenditures . Indeed, according to data from Rigzone, the utilization of rigs is broadly down across all types from the same period a year ago.


Source: Rigzone

Not just oversupply
Barclays' analysts also suggested that companies with older fleets are more likely to suffer from this downturn than drillers with newer fleets -- a trend that has been forecast for some time. Unfortunately, in the worst case, Barclays believes that earnings before interest, taxes, amortization, and depreciation forecasts over the next two years will be up to 35% less than originally forecast for some drillers.

Remaining upbeat
However, somewhat surprisingly, Seadrill and its management remain upbeat on the drilling market outlook through 2020. This could be in part due to the company's modern fleet. For example, the average age of Seadrill's drill ship fleet is around five years, the youngest of all the offshore deepwater drillers. In comparison, Diamond's average floater unit age is slightly under 30 years and Transocean's average age is over 20 years. Still, both Diamond and Transocean have a number of new drilling ships slated to be delivered during the next few years, which should improve their outlook.

Nevertheless, in contrast to analyst forecasts, Seadrill sees a huge imbalance building in the market for drilling units over the next few years. The company expects that the market for drilling units will be undersupplied by around 189 units based on estimated 2020 -- if this turns out to be true, the market will see a huge spike in demand during the next six years. But this is just the drillship market, Seadrill sees further imbalance in the jack-up market. In particular, the company estimates that by 2020 the majority of the global jack-up fleet will be over 35 years old and will need to be replaced.

Seadrill is well positioned to ride out a market downturn over the next few years but Transocean and Diamond are badly positioned. The biggest problem for both Transocean and Diamond is the age of their fleets, which is likely to be a sticking point for customers requiring their services. Although, as mentioned above, both companies do have a number of new builds under construction, these will not be enough to offset the decline in revenue from older units.

Specifically, the average age of Transocean's drillship's is over two decades, and the average age of its jack up rigs is just under 15 years. Meanwhile, the average age of Diamond's floater units is over three decades. No wonder Seadrill is so positive on its outlook for the next two years if it has to compete with such aged competitors .

Foolish summary
So, it would appear that the global market for offshore oil and gas drilling services is about to enter a cyclical decline. Still, some companies are better placed than others to ride out this cyclical downturn and Seadrill, with its new fleet of high-spec UDW drilling units believes that it is going to see a strong demand for its services through the next decade or so.

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The article Yet More Analysts Turn Negative on Offshore Drilling originally appeared on Fool.com.

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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