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Offshore Oil’s Dire Straits

By Motley Fool Staff – Sep 21, 2016 at 2:20PM

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How bad offshore oil operations are hurting right now, and what investors need to keep in mind before buying in.

The dip in energy has hurt most players in the oil space -- especially the fledgling offshore oil industry.

In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about how badly the industry is hurting, and what investors should remember about buying into these companies.

A full transcript follows the video.

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This podcast was recorded on Sep. 1, 2016.

Sean O'Reilly: The other party that's hurting because of this is the offshore industry.

Taylor Muckerman: Yeah, that's the frontier of oil production right now.

O'Reilly: And literally frontier, because all this fracking, correct me if I'm wrong, is on land, usually.

Muckerman: Yes.

O'Reilly: Is the offshore sector up a creek without a paddle? Up the Gulf of Mexico without a paddle?

Muckerman: Yeah, it kind of run into some rough seas, no pun intended with the hurricanes that are coming toward Florida right now. But yeah, you're looking at rigs dropping pretty significantly. Expected spending from GE (GE 0.31%) across the board in 2016 down 14% for international oil companies, 9% for national oil companies, and 40% for North American independent companies. Then, a company by the name of the Dril-Quip (DRQ -2.16%), which produces equipment for drill ships and a subsea well heads, they're looking at a bottoming of the floating rig count this year or next year, around 170. But, if you look at 2014 peak, it was 250, 260 rigs out there.

O'Reilly: And these are for long-tail projects.

Muckerman: Yes, these are for very long-tail projects. If you talked to people in the early 20-teens, they expected offshore oil to be the lifeblood of the oil industry for the long tail. And right now, it's just not getting developed. You're seeing companies dry stack rigs, which is basically pulling them off and leaving them in the port, not using them; or, they're just retiring them altogether. And, they're also reducing the amount of rigs that are under construction, which needed to happen, because there was this huge rush to construct these offshore rigs, because everyone thought that was going to be taking place a lot sooner that it has. Obviously, the price of oil collapsing didn't help matters. So, maybe the industry saves itself by dry stacking some of these older rigs and reducing rigs under construction. But at the current time, it's a few years away from a recovery, in my mind.

O'Reilly: Got it. So, steer clear of the offshore drillers, even if they look cheap?

Muckerman: I mean, earnings are down, so they don't necessarily look supremely cheap. Stock prices look cheap, comparatively to where they were a few years ago. But with earnings collapsing the way they have, multiples really haven't done the same. So, don't necessarily always look at P/E multiples when you're looking at energy company -- or any company, really, in general, but especially cyclical industries. With volatile earnings, P/E multiples don't really always resemble how cheap or how expensive these companies truly are, based on how they're currently performing. Granted, you always want to try to time the bottom of the cycle for these companies. But it's particularly tough right now.

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. 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.

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Stocks Mentioned

General Electric Stock Quote
General Electric
GE
$88.14 (0.31%) $0.27
Dril-Quip Stock Quote
Dril-Quip
DRQ
$23.58 (-2.16%) $0.52

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