Never Mind Ensco’s New Contract, Offshore Drillers Still Set to Struggle

Higher oil prices have helped offshore drillers like Ensco (ESV), Noble (NE), Diamond Offshore Drilling (DO) and Seadrill (SDRL) rally and now they’re getting another boost today after fleet updates from Diamond Offshore and Ensco.

Reuters

Diamond Offshore’s fleet update was largely in-line with expectations, note Cowen’s J.B. Lowe and Roland Morris:

As previously announced The Ocean Lexington has been contracted to work for a term of 1,189 days starting in December 2014 at a dayrate of $160k/d with PEMEX. The rate reflects the weak pricing environment in the lower-end of the floater market, but squeezing out any cash flow over the next several years from this asset is a positive for the rig given that it would have likely been stacked had it not won the contract.

But Ensco’s fleet status update contained a shocker: It had contracted one of its offshore drillers at a rate well above what anyone thought possible in this weak market. Johnson Rice’s Georg Venturatos explains:

Ensco provided an updated fleet status report, which was highlighted by an initial contract for its ultra-deepwater newbuild drillship, Ensco DS-8 (12,000′), expected to begin work for Total (TOT) in Angola during 3Q15 (through 3Q20) at an initial dayrate in the high $610 range (vs. our estimate of $505k/day) with periodic increases equating to an average rate in the mid-$650 range over the 5-year program (ex-mob).

Cowen’s Lowe and Morris warn not to read too much into Ensco’s new contract:

The $650kd average rate is well ahead of the low-$500′s that we expected, as negotiations with Total began nearly a year ago, and the rig was initially bid over a year ago when the UDW market was significantly stronger. The current market remains challenged, with lower-spec ultra-deep water assets commanding rates as low as $350k/ d. We expect the current market weakness to last well into 2015. There are still 10 ultra-deep water assets newbuilds scheduled for 2014 delivery and an additional 16 without contracts; we expect that several will be delivered without a contract or will have their deliveries pushed back.

That hasn’t stopped the drillers from sustaining their recent strength. Ensco has risen0.2% to $54.12 at 11:56 a.m. after rising 2.9% during the past five days of trading, while Diamond Offshore has advanced 1.2% to $48.73 after rising 4.8%, Seadrill has ticked up 0.4% to $39.60 after gaining 3.1% during the past five days and Noble is up 0.5% to $34.05 after advancing 6.2%.

RBC Capital Market’s Kurt Hallead and team don’t think the recent strength in offshore drillers can continue:

We believe that last week’s rally was driven more by short covering than a change in fundamentals. We still think the offshore market will be characterized by dayrate pressure through the rest of ’14, making it difficult for the group to sustain relative outperformance.

Still, the rally’s have been quite impressive and now their shares are approaching their 200-day moving averages. If they break through, the rally could have legs.