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What happened
After an impressive 20% surge yesterday, shares of Seadrill (SDRL +0.00%) have risen another 13% as of 10:45 a.m. EDT today. The big gains this week are all pretty much premised on the announcement from OPEC yesterday that it plans to cut its production levels.
So what
The details of the OPEC agreement aren't completely fleshed out -- that's for the November meeting in Vienna (which just happens to be the same time and place in 2014 when OPEC decided to not curb production). The rough outline of the deal in place is to reduce the total output of all OPEC nations from its most recent production of 33.24 million barrels per day to about 32.5 million barrels per day. The hope is that by the Vienna meeting in November, OPEC will have brought some other non-OPEC producers on board such as Russia and Mexico to curtail overall production.
This is important for Seadrill and other long-suffering offshore rig companies because producers need higher prices to justify spending on more offshore production projects that would require the services of Seadrill's rigs. The company has been operating on borrowed time as its existing contracts have been slowly winding down without any new work to speak of. The hope is that this production cut will be the catalyst the industry needs to finally start spending money again on new projects.
You might have thought that energy stocks like Seadrill would have had a bit of a hangover after yesterday's stock price party, but apparently it went through the night and into today. That, more than anything else, is probably related to how pessimistic Wall Street was about this stock recently. Even after the rally over the past couple days, shares of Seadrill are still trading at just 0.12 times tangible book value.
Now what
The news that OPEC intends to cut production is indeed promising for Seadrill's future as it might signal a long-anticipated turnaround for the industry in general. Before investors get too excited, though, keep in mind that there are a lot of moving parts that need to take place before this positively impacts Seadrill's bottom line. First, supply and demand dynamics need to improve enough to increase cash flows for producers. Then, those producers need to repair the damage low oil prices inflicted on their balance sheets. Last, they need to start evaluating new projects again, and Seadrill needs to openly compete with other rig owners for these contracts.
It could take a little while to work through all these, but at least we now have some hope that the market is headed in the right direction for Seadrill.
