Pacific Drilling May Be More Exposed to Industry Downtime Than the Market Thinks

Pacific Drilling's stock price has not been affected by the weakness in the offshore drilling industry at all. However, the company may be more exposed to the market weakness than Wall Street seems to think.

Apr 4, 2014 at 1:48PM

Investors who intently follow the oil space are by this point no doubt aware of the market weakness that has been plaguing the offshore drilling sector. This market weakness has caused the stock prices of many of the companies particularly active in the space to get beaten down from the highs they achieved last year. But, not all stocks in the sector have been beaten down.

In fact, there are some offshore drilling companies whose stock prices have remained remarkably stable since the industry began to experience difficulties. One of those stocks is Pacific Drilling (NYSE:PACD). Through this stability, Mr. Market appears to be telling us the company will not be affected by the weakness in the sector. But, is he correct? Let's find out.

Explaining the problem in the market
According to offshore drilling giant Seadrill (NYSE:SDRL) in its fourth-quarter 2013 earnings report, the weakness in the offshore drilling sector is primarily limited to the ultra-deepwater environment as opposed to the shallow-water environment. In fact, Seadrill states oil and gas companies are still quite actively demanding shallow-water jack-up rigs.

However, exploration and production companies have been forced to reduce their exploration budgets because of rising production costs in areas such as onshore North America (primarily in the shale regions). Unfortunately, offshore drilling rigs are mostly used in exploration, so the reduction of spending in exploration activities has reduced the demand for offshore drilling rigs. As ultra-deepwater rigs cost significantly more to contract out than shallow-water jack-up rigs, they have been most affected by the reduction in spending.

Another reason for the weakness in the ultra-deepwater sector is an increase in supply. During the offshore drilling boom that lasted from 2011 to 2013, offshore drilling contractors ordered a large number of new rigs. However, the reduction in exploration spending has meant many firms have had difficulty securing contracts for their new rigs. This is why there are 17 ultra-deepwater rigs that will be delivered to their respective drilling companies in 2015 and 2016 that do not yet have contracts. However, this is not so many that it will result in a glut in the industry.

There were 28 rigs delivered in 2011, for instance, and that most certainly did not cause a glut. However, exploration spending was high in 2011, and that is not the case today. With demand soft because of lower exploration spending and the supply increasing, day rates are being forced downward. This could result in lower revenues and cash flows for some companies in the sector .

How does Pacific Drilling fit in?
Well, Pacific Drilling only owns and operates ultra-deepwater rigs. The company has no shallow-water rigs in its fleet. Therefore, it would be reasonable for us to conclude that the company would be more affected by the weakness in the ultra-deepwater market than a company such as Ensco (NYSE:ESV) or Seadrill, which also have shallow-water fleets to offset the weakness in the ulta-deepwater environment. Yet, the market has not borne this out, as we can see by looking at the stock charts for the three companies.

PACD Chart

PACD data by YCharts.

As the chart shows, Pacific Drilling has outperformed two of its largest competitors despite the fact that its fleet is entirely ultra-deepwater rigs. It is also by far the most expensive stock on a price-to-earnings basis. So, what's going on?

Pacific Drilling is not less exposed than peers
At first, we may conclude Pacific Drilling is not as exposed to the downturn as its fleet composition may make us think, but this does not appear to be the case. Here is the company's fleet along with the contract status of each of its rigs.

Screen Shot

Source: Pacific Drilling. 

As this chart shows, Pacific Drilling has two rigs that will leave the shipyard in 2014 and 2015 that it has not yet secured contracts for. In addition, the company has two rigs that will come off contract in 2014 or 2015 that the company has not secured replacement contracts for.

Rig Name Contract End Date
Pacific Mistral February 2015
Pacific Khamsin December 2015

These new rigs and expiring contracts mean Pacific Drilling will be attempting to shop around half of its rigs for new contracts in 2014 and 2015. These are the two years when the market is expected to be weakest. Thus, Pacific Drilling may have to settle for lower dayrates on its rigs than it otherwise would if the market were stronger. With that said, the company is still likely to see growth if it can secure contracts for all of its rigs that need them because it will have more rigs operating than it does now.

Want offshore exposure without buying a driller?
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!

Daniel Gibbs has a long position in Pacific Drilling and Seadrill. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers