Is Offshore Drilling Washed Up?

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"There just seems to be a complete disconnect between the health of the business and what's going on in the marketplace."
- Dan Rabun, Chairman/CEO of Ensco International (NYSE: ESV)

I figured I'd lead off with that quote, since it summarizes this offshore driller's situation quite succinctly. Ditto for competitors like Diamond Offshore (NYSE: DO) and still-seaworthy Noble (NYSE: NE).

Given the latest Friday freakout, I'm not sure anyone really cares about what happened in the third quarter, but it was naturally a good one for Ensco, considering the tightness in offshore drilling markets around the world. Per-share earnings from continuing operations were up 20%. Neato.

So business is in shambles now that oil prices have been cut in half, right? The share price seems to say so. But the facts are quite different: Ensco has 95% contract coverage for fourth-quarter revenue. So I guess 2009 is where this all falls apart?

Well, no. 2009 is actually when a lot of great things start happening, including three newbuild deepwater vessels beginning new multiyear contracts. Chevron (NYSE: CVX) gets the ENSCO 7500 down in Australia. Then the ENSCO 8500, the first of seven in a new line of a spiffy semisubmersibles, heads to the Gulf of Mexico for Anadarko (NYSE: APC) and Eni (NYSE: E). Finally, the ENSCO 8501 starts drilling for Nexen and Noble Energy in the third quarter next year. As we learned from National Oilwell Varco (NYSE: NOV), the top shipyards are cash-rich, and I just don't see these major offshore projects running up on the rocks.

For 2009 and beyond, 85% of customers are either investment-grade companies or national oil companies. These people won't pack up and leave at $50 to $75 oil. If we go lower, things will get hairy, but so far, there's just no sign of the offshore implosion that today's share prices seem to signal.