Barclays analyst J David Anderson has found that shares in offshore drilling companies have risen 40% since March, describing them as the ‘most overvalued group’ in the Barclays ‘coverage universe’.
Anderson, who downgraded US company Noble Energy (NE) to an ‘underperform’ rating yesterday, initially raised his price targets for the group. Since then, however, he has recorded underweights for all five of the major offshore drilling companies, namely NE, Diamond Offshore Drilling (DO), Ensco (ESV), Rowan Companies (RDC), and Transocean (RIG).
Share prices indicate that day rates for drilling services will surpass $400,000 per day by mid-2022, despite overcapacity for semisubmersible drillships, or ‘floaters’.
Drilling companies have reported stronger demand for jack-up rigs, but oversupplies in the floater rig market remain high.
Anderson said he does not expect day rates to rise as much as stock prices may imply, forecasting a lesser rate of $304,000 per day in Q3 of 2021, and $410,000 by Q4 of 2025. This equates to a possible 27% average stock decrease from current levels, he said.
Despite DO’s new contract wins in Brazil, with the country looking to increase its floater count from 21 to 40, according to RIG, Anderson said the industry still looks shaky.
Although DO and RIG are making progress in faster and more efficient well drilling, compensation for drillers in terms of higher day rates is not improving enough.
DO said that day rates for its new drillships were unlikely to increase until 2020 at the earliest. NE said day rates for its drillship offshore Guyana remains low. NE told investors: “We haven’t seen leading-edge day rates move in quite some time”.
RIG may be the hardest-hit company, with 39% downside potential to reduce share prices to $8, according to Anderson. ESV shares could fall by 34% to $5 per share, while DO could fall by 25% to $14. NE and RDC share prices could fall by 18% and 19% respectively.
Shares of offshore oilfield services companies have fallen in recent months due to Brent crude prices reaching $72 per barrel.