Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



SeaDrill Sees Robust Demand Through 2020

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

With Noble Corporation (NYSE: NE  ) reporting a pause in deepwater drilling demand and an influential analyst predicting plunging demand in the sector, it's a good time to review the long-term case in the sector. Last week, SeaDrill (NYSE: SDRL  ) attended the SEB Nordic Seminar and reiterated a very bullish long-term case for offshore rigs. With the company's stock down over 20% in a few months, investors should consider the stock if one believes in the bull case.

SeaDrill is a leader in the deepwater drilling segment focused on building out a high specification fleet and returning large amounts of capital to investors. The company's stock currently yields over 10%.

One of the major dynamics since the Macondo explosion in the Gulf of Mexico is a preference for high-specification modern rigs. The demand equation is shifting toward high demand for new builds and a slack of demand for old rigs. In this scenario, a firm with new rigs can reach near 100% utilization while rigs over 30 years need to be retired. A firm on the wrong side of the age equation might find this to be a major obstacle. 

Short-term negatives
During its earnings release, Noble predicted that the market for offshore drilling was entering a short-term pause that should refresh the market. The company forecasted a large 7% gain in costs for 2014, suggesting that the segment needed a slowdown in demand in order for crews and suppliers to catch up. Management was of the opinion that a temporary period of weakness would improve the long-term outlook.

Barclays predicted that deepwater drillers could plunge 35% on average, though the prediction seems highly unlikely based on Brent crude prices above $105. The analyst predicts that dayrates for ultra-deepwater rigs will plunge to $475,000 with the average rates dropping 16%. The analyst also predicts the decline could send SeaDrill down 52%. In the scenario, Diamond Offshore (NYSE: DO  ) could plunge 45%, similar to SeaDrill.

Long-term supply imbalance
SeaDrill offers a contrary view, especially compared to the recent near-term bearishness. The company sees a global rig supply and demand imbalance over the next six years or so. The biggest part of the uncertainty and where most participants differ is on the level of rig retirements. In fact, SeaDrill sees such a massive imbalance that it expects a 189-rig shortage based on 2020 demand. The company sees the 60 new builds over the next three years only slightly exceeding the 50 rig retirements. That scenario leaves a shortage based on increased demand requiring over 45 rigs built in the remaining years up to 2020.

SeaDrill sees an even bigger issue with the jack-up market where the fleet continues to age dramatically. By 2020, more than 220 of the currently contracted jack-up fleet will be more than 35 years old.

Bottom line
These contrary views are difficult to balance. The major difference is the short-term versus long-term nature of the different calls. No matter how accurate SeaDrill might be regarding long-term supply and demand imbalances, the market is likely to go through several weak periods in those years. An investor in agreement with the long-term thesis should use the current weakness to invest in the sector and especially the companies aggressively building new rigs. The ride to long-term gains is never without bumps along the way.

The best way to play offshore drilling
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2820446, ~/Articles/ArticleHandler.aspx, 8/29/2015 2:17:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Mark Holder

Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
DO $24.29 Up +1.26 +5.47%
Diamond Offshore D… CAPS Rating: ***
NE $12.82 Up +0.43 +3.47%
Noble Corp CAPS Rating: ****
SDRL $7.90 Up +0.52 +7.05%
Seadrill CAPS Rating: ****