Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: Is Now the Time to Buy or Flush the Floaters?
July 21, 2014
By now, most energy investors are well aware of the coming surge in offshore rig deliveries that will soon lead to an over-supplied offshore drilling rig market. This viewpoint has now become so consensus that many contrarian and/or value investors are now starting to wade back into the offshore drilling stocks. This has even led to an offshore drilling stock rally over the past four months (after suffering a precipitous fall in late 2013/early 2014). On the surface, the offshore drilling space appears inexpensive, with EV/EBITDA multiples of ~6x and many offshore drillers trading below book value. Don't get sucked into the value trap. We think the offshore rig fundamentals will get much worse for longer than many think. In today's Stat, we will focus on the offshore floating rig market and try to quantify the magnitude and duration of the pending cyclical downturn. Specifically, we will try to detail our thoughts on how many floating rigs will need to be stacked, when they will be stacked, and how far dayrates for different rig classes will likely fall during the process. Next week, we will do the same for the jackup rig market. Before getting into the details, investors should understand that there are many moving parts to an offshore drilling rig supply/demand/dayrate model with many circular references that compound the difficulty of a black or white answer.
This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.
There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
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