Shares of Atwood Oceanics (NYSE:ATW) rocketed higher on Wednesday morning, up 20% by 11:30 a.m. EST, after OPEC agreed to a deal to cut and cap its output.
According to multiple reports, OPEC has agreed to a deal to cut its production by 1.2 million barrels per day from its current rate of 33.6 million barrels per day. That cut represents about 1% of global production, and more importantly, will ease the current glut of oil that has been weighing on the market for more than two years.
That deal lit a fire under the price of crude oil, with the global benchmark Brent jumping as much as 8% by mid-morning to more than $50 a barrel. That rally provided all the fuel that oil stocks needed to stage a massive comeback.
More specific to Atwood Oceanics, the OPEC deal should put a firm floor under the price of oil, which could provide large oil companies like Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) with the confidence to make investment decisions on new offshore oil projects. In Chevron's case, it had been leasing Atwood's Osprey ultra-deepwater rig. Chevron elected to shorten that contract so that it now expires in 2016, but the OPEC deal might convince Chevron to reconsider that decision or consider leasing other rigs in Atwood's fleet. The same thing goes for Royal Dutch Shell, which has a contract for Atwood's Condor ultra-deepwater rig that expires this year. Bottom line: The OPEC deal should make it easier for Atwood to find work for its rigs, because with more certainty around prices and market fundamentals, oil companies are likely to be more open to investing offshore.
Investors clearly hope that the OPEC deal will be the catalyst the offshore industry needs to drive a more active rig-leasing market. That said, Atwood still needs to win these contracts at high enough day rates to more than cover its costs. With so many offshore rigs currently seeking work, that is easier said than done.