Analysts Are Split on the Outlook for These Offshore Drillers

Wall Street feels that Rowan Companies is well placed to profit, but that Diamond Offshore will suffer.

May 27, 2014 at 1:32PM

There continues to be much confusion about what's going on in the world of offshore drilling.

Depending who you talk to, half of Wall Street believes that the sector is good value and should be brought for attractive dividend yields and low valuations. Meanwhile, the other half of the Street believes that the sector should be well and truly avoided.

Two companies that have recently come under the scrutiny of analysts are Ensco (NYSE:ESV) and Rowan Companies (NYSE:RDC). As usual, though, analysts are divided on their outlook .

Negative comments
Analysts have turned negative on Ensco as even after the delivery of the company's new floating rigs, the company will unfortunately still rely on its old jack-up rigs to generate around one third of sales. This will be an issue going forward.

In fact, one thing that analysts universally agree on around the world is the fact that jack-up rig day rates could fall as much as 35% over the next year or so as new units enter the market.

This slew of new units, ordered during the boom times, is set to hit the market during the next few years. Unfortunately, the oil industry is also starting to squeeze costs, and a number of rigs are coming off contract during the same period, creating a perfect storm.

When all these factors combine, it means that customers have the upper hand when it comes to contracting out drilling units. This will let them renegotiate at lower prices. That's bad news for companies with larger jack-up fleets such as Ensco.

Positive comments
Of course, analysts remain positive on Rowan Companies, despite the fact that the company's fleet is almost entirely jack-up units.

Why? Because one of the company's largest customers is Saudi Aramco, which according to analysts, is known for tying up rigs for extended periods for high day rates.

This actually showed through in Rowan's first quarter conference call when management revealed that Saudi Aramco had extended the contracts for all three of the Rowan jack-up units that were working for the state-sponsored entity, which were set to come off contract during the quarter.

Specifically, two of Rowan's units, the Scooter Yeargain and the Hank Boswell, were both extended for one year to $180,000 per day, up from the existing rate of $127,500. The Rowan Mississippi was also extended for one year at a day rate of $195,000 per day, up from the existing base rate of $170,000 per day.

Negotiations are ongoing with Saudi Aramco for the remaining four units scheduled to come off contract in 2014. Based on the above transactions, however, it would appear that Rowan's units within the Middle East are likely to find themselves in full employment for the next year or so.

Ensco does have some of its jack-up units contracted out to Saudi Aramco, but it's only eight out of 41 units. These units on contract to Saudi Aramco are also on some of the lowest day rates in Ensco's entire fleet, meaning that while Ensco's jack-up fleet has exposure to Saudi Aramco as a high-quality customer, the revenue contribution is low as a percentage of the overall fleet.

Foolish summary
The key takeaway here is the fact that Rowan, despite being highly exposed to the jack-up market, is safe due to the fact that its units are on contract with Saudi Aramco, a great customer. On the other hand, Ensco is more exposed to the jack-up market and only a few of its rigs are with Saudi Aramco, and those are at very low prices.

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!

Rupert Hargreaves owns shares of Rowan Companies. The Motley Fool has no position in any of the stocks mentioned. 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 www.fool.com/podcasts.

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 www.fool.com/podcasts, 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