by Stephen Akin | Recent data, research and articles point to a promising 2023
Most of you know that prior to entering the investment world I held a Merchant Marine Masters License. For several years I worked for Seal fleet and Hornbeck Offshore. In this post we take a look at what's going on in the industry.
The MARATIME EXECUTIVE Reports that Pirates robed two offshore supply vessels the Gulf of Campeche
The offshore oil and gas sector in Mexico's Bay of Campeche is a longtime hotspot for armed robbery, often linked to organized crime. Armed pirates boarded two offshore vessels in two days on the 28th and 29th of December, according to local media, leaving the crew unharmed but making off with valuable equipment.
In the early hours of Thursday morning, a crew of six armed robbers boarded the AHTS / spill response ship Bourbon Alienor, operated by Bourbon's local subsidiary. They made off with SCBAs, tools, radios and other gear in a small boat, according to Tribuna Campeche. The attack was reported to the Mexican authorities at about 0245, and the Mexican Navy (Semar) responded within several hours to take a report.
The day before, a crew of pirates reportedly boarded the Bourbon Artabaze, operated by the same firm. No further details on the boarding were available.
Piracy and armed robbery are a frequent problem for state oil company Pemex and its contractors in the Gulf of Mexico. Criminal gangs target platforms as well as offshore support vessels on a regular basis; the number of actual incidents is believed to be greater than the number reported. Crewmember abductions have not been reported, but seafarers have been threatened, forced to help move stolen goods and (in the worst cases) injured. Rigs, production platforms and offshore vessels have all been targeted. An increase in capex spending in oil and gas as well as renewables, combined with a tighter supply of active tonnage, continues to point towards greater optimism for the offshore vessel market over the course of the year.
The Wall Street Journal
The Offshore Oil Business Is Gushing Again by Bob Henderson
The $1.2 billion Deepwater Titan sat idle in a Singaporean shipyard for five years, looking like an abandoned cruise ship with a derrick attached to its deck. Soon this vessel that spans nearly three football fields will depart for the deepest waters of the Gulf of Mexico, where its crew will be able to drill 8 miles below the seafloor in search of oil for Chevron Corp.
The hunt for offshore petroleum is on again, fueled by a surge in global demand for energy, supply disruptions triggered by the war in Ukraine and crude prices that remain above prepandemic levels. Other giant rigs such as Titan that were dormant near the end of the last decade are also now operating in deep waters along the coast of Brazil, while rigs lacking propulsion are mining shallower waters in the Middle East after hitching rides to that part of the world on tugboats.
Of roughly 600 rigs worldwide that were available to lease for offshore projects in December 2022, about 90% were working or under contract to do so, according to research firm Westwood Global Energy Group. That was up from roughly 63% five years earlier.
Some beneficiaries of the new offshore drilling boom are companies such as Transocean Ltd., Valaris Ltd. and Noble Corp. that own and staff the rigs, the most coveted of which are massive drillships such as Titan that are prized for their ability to work deftly in deep waters. These contractors are now charging the oil companies that lease drillships more than $400,000 a day, up from around $300,000 early last year and less than $200,000 two years ago. Analysts are forecasting rates will exceed $500,000 next year.
"Over the past year and a half, everyone started drilling again offshore, and they want to use the most efficient rigs and all of a sudden, bam!" says Noble Chief Executive Robert Eifler. "After eight years we basically have full utilization of the high-end drillship fleet."
Many new offshore bets are gravitating to South America and the Mideast. The Atlantic Ocean coastlines of Brazil, Guyana and Suriname are bristling with drillships due to a big production push from Brazil's national oil company as well as several significant oil finds made in neighboring waters in recent years. Saudi Arabia and the United Arab Emirates are each relying heavily on offshore drilling to increase their oil production capacity by 1 million barrels a day as of 2027, bringing their totals to 13 million and 5.5 million, respectively. As much as 80% of Saudi Arabia's new capacity will come from offshore sources, according to research firm Evercore.
Rig contractors say they learned their lessons from past boom-and-bust periods, including a 2014 downturn that forced some companies to declare bankruptcy, and won't overextend themselves this time around.
They still have to grapple with plenty of risks. Offshore projects are typically more expensive than drilling on land, so it takes longer for production to repay those costs. Demand for oil could plummet in the coming years if the worldwide transition from fossil fuels speeds up and more countries take steps to reduce their emissions. And they face opposition from environmental groups that worry about drilling's impact on the climate as well as the danger of unexpected disasters. The 2010 explosion on the Deepwater Horizon rig in the Gulf of Mexico unleashed the worst offshore oil spill in American history.
The boom could help boost certain developing nations such as Guyana. Oil riches have the potential to shower that poor South American country with billions in revenue in the coming decades. It is expected to produce 1.7 million barrels of oil a day by 2035, making it the fourth largest offshore oil producer in the world ahead of the U.S., Mexico and Norway, according to research firm Rystad Energy.
Offshore drilling dates back to 1897, nearly four decades after the first successful oil well was drilled on land in Pennsylvania. It started with a series of rigs off the coast of California that were attached to narrow, wooden, quarter-mile-long piers, designed to drill in water up to 35 feet deep. It took another half-century for the first productive well to be drilled beyond the sight of land when Kerr-McGee Oil Industries went roughly 10 miles off the Louisiana coast in 1947. Those waters were 18 feet deep.
As drillers moved into deeper waters in the subsequent decades, rigs became more mobile. Jackups that resembled shape-shifting Transformers were built to stand on the seabed using retractable legs, so the rigs could be moved and reused when a well was finished. Floating semi-submersible rigs were developed to drill in waters too deep to stand in, using pontoons partially filled with water for stability. Drillships with derricks mounted on their decks gave rigs the ability to maneuver efficiently between well sites.
Much of this development took place in the Gulf of Mexico and the North Sea in the 1960s and 1970s, and major oil finds were made during that period off the shores of Mexico and Brazil. Even Middle Eastern countries like Saudi Arabia that had vast reserves on land got in on the act. By 2000, offshore sources were responsible for about 35% of global crude oil production, according to Rystad. Following the 2008-09 financial crisis, drillers took advantage of low interest rates and borrowed heavily to boost their fleets.
The last boom came to an end in 2014, when oil prices crashed due to a surge of supply from U.S. shale oil producers and a refusal by the OPEC cartel to cut its petroleum output. Many drillers either went bankrupt or had to restructure their debt. Rigs of all types were stranded mid-construction in shipyards, scrapped or cold-stacked -- meaning shut down and stowed. Drillships as young as 11 years old were sold for scrap, and the fleet of rigs that contractors were ready to lease was slashed by more than 35%, according to Westwood.
But now that market is back. Offshore drilling got a boost as the pandemic subsided and prices and demand for energy surged while the growth of U.S. shale production slowed, encouraging oil producers to invest in new offshore projects. The war in Ukraine and sanctions against Russia then disrupted oil and gas supplies, prompting searches for new energy sources around the world that might spur even more offshore exploration and production.
A dearth of drillships is buoying the prices oil companies pay to lease them. Of the 82 drillships that survived the culling of the last decade and are being marketed now, only four aren't drilling or in contract for later this year, according to Westwood. Even though crude prices have fallen recently, they are still higher than prepandemic levels and are well above what companies say they need to turn a profit on offshore wells.
"We're calling it a supercycle because things are going up so quickly," says Cinnamon Edralin, head of rig market research at Esgian Rig Analytics.
The untapped potential of deep-water reserves offers new appeal since shallower fields have been more thoroughly exploited. Deep-water drilling has long been dominated by the so-called Golden Triangle of Brazil, Gulf of Mexico and West Africa. Of approximately 100 deep and ultra-deep water drillship contracts signed in 2022, nearly two-thirds were for projects in these three regions, according to data from S&P Global.
One vertex of that triangle is singularly in vogue. Roughly a third of the world's working drillships are now clustered off the coasts of Brazil and its neighboring countries of Guyana and Suriname, according to research firm Esgian. Brazil's state-controlled oil company, Petróleo Brasileiro SA, known as Petrobras, is planning to invest $78 billion between this year and 2027, and two-thirds of that will go to deep-water projects, including the drilling of 42 new exploration wells in 2023 alone, according to Evercore.
The biggest operator in Guyana is a consortium of Exxon Mobil Corp., Hess Corp. and China National Offshore Oil Corp that first struck oil in the country's waters in 2015. Since then, the country has accounted for nearly one fifth of the new crude discovered worldwide, according to Rystad.
Despite the intense demand for drillships, contractors are cautious about reactivating the 15 or so ships that remain cold-stacked due to the last downturn. The reactivation process can take 12 to 18 months and cost more than $100 million, figures that have ballooned since the pandemic due to supply chain constraints and labor costs.
Noble owns two such ships. "We would be very conservative in considering reactivation, and for now we would look to have a significant portion of that $100 million of capital paid upfront in a firm contract," says Noble's CEO, Mr. Eifler. "We wouldn't spend that kind of money speculatively at this stage."
The CEOs of Transocean and Valaris recently made similar statements. Last July, Valaris announced a $327 million deal with Norwegian oil company Equinor ASA to deploy its drillship Valaris DS-17 for 540 days in a deep-water field off the coast of Brazil. Of the total, $86 million was paid upfront partly to cover the ship's reactivation.
Drillships aren't the only offshore rigs in high demand. Jackups, the rigs that stand on the seabed in waters up to about 500 feet deep, are also hot thanks to demand from the Middle East.
Saudi Arabia's national oil company, Aramco, and Adnoc, the national oil company of the United Arab Emirates, have been scouring the globe for jackups since early last year. They leased them from contractors, bought them from the creditors of bankrupt drillers and drove the day rates of the most advanced versions to as much as $130,000, up from less than $75,000 in 2021, according to Esgian. About 91% of the marketed jackups worldwide were in use or under contract last December, according to Westwood, up from about 65% in December 2017.
When doing my research for this post I saw a report from Zacks research on Transocean (RIG) here's a portion of the report.
This is an example of how momentum trading works. To be clear I am in no way recommending the stock to anyone at this time, this is not a solicitation.
Transocean (RIG) is a Great Momentum Stock: Should You Buy?
Momentum investing revolves around the idea of following a stock's recent trend in either direction. In the 'long' context, investors will be essentially be "buying high, but hoping to sell even higher." With this methodology, taking advantage of trends in a stock's price is key; once a stock establishes a course, it is more than likely to continue moving that way. The goal is that once a stock heads down a fixed path, it will lead to timely and profitable trades.
While many investors like to look for momentum in stocks, this can be very tough to define. There is a lot of debate surrounding which metrics are the best to focus on and which are poor quality indicators of future performance. The Zacks Momentum Style Score, part of the Zacks Style Scores, helps address this issue for us.
Below, we take a look at Transocean (RIG Quick QuoteRIG - Free Report), a company that currently holds a Momentum Style Score of B. We also talk about price change and earnings estimate revisions, two of the main aspects of the Momentum Style Score.
It's also important to note that Style Scores work as a complement to the Zacks Rank, our stock rating system that has an impressive track record of outperformance. Transocean currently has a Zacks Rank of #2 (Buy). Our research shows that stocks rated Zacks Rank #1 (Strong Buy) and #2 (Buy) and Style Scores of A or B outperform the market over the following one-month period.
Set to Beat the Market?
In order to see if RIG is a promising momentum pick, let's examine some Momentum Style elements to see if this offshore oil and gas drilling contractor holds up.
A good momentum benchmark for a stock is to look at its short-term price activity, as this can reflect both current interest and if buyers or sellers currently have the upper hand. It's also helpful to compare a security to its industry; this can show investors the best companies in a particular area.
For RIG, shares are up 10.32% over the past week while the Zacks Oil and Gas - Drilling industry is flat over the same time period. Shares are looking quite well from a longer time frame too, as the monthly price change of 42.33% compares favorably with the industry's 6.44% performance as well.
Considering longer term price metrics, like performance over the last three months or year, can be advantageous as well. Shares of Transocean have increased 52.35% over the past quarter, and have gained 106.03% in the last year. On the other hand, the S&P 500 has only moved 3.5% and -7.86%, respectively.
Investors should also take note of RIG's average 20-day trading volume. Volume is a useful item in many ways, and the 20-day average establishes a good price-to-volume baseline; a rising stock with above average volume is generally a bullish sign, whereas a declining stock on above average volume is typically bearish. Right now, RIG is averaging 26,279,260 shares for the last 20 days.
Earnings Outlook
The Zacks Momentum Style Score encompasses many things, including estimate revisions and a stock's price movement. Investors should note that earnings estimates are also significant to the Zacks Rank, and a nice path here can be promising. We have recently been noticing this with RIG.
Over the past two months, 1 earnings estimate moved higher compared to none lower for the full year. These revisions helped boost RIG's consensus estimate, increasing from -$0.57 to -$0.55 in the past 60 days. Looking at the next fiscal year, 2 estimates have moved upwards while there have been no downward revisions in the same time period.
Bottom Line
Given these factors, it shouldn't be surprising that RIG is a #2 (Buy) stock and boasts a Momentum Score of B. If you're looking for a fresh pick that's set to soar in the near-term, make sure to keep Transocean on your short list.
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