Offshore Rig Flare With Maritime Vessels

Image source: Getty Images.

What happened

Shares of RigNet (NASDAQ:RNET) rallied sharply on Friday, up more than 13% at 3:00 p.m. EST.

So what

Offshore service stocks jumped on Friday without any news to drive the rally, with RigNet joining the likes of Seadrill Partners (NYSE:SDLP) and others in a double-digit rally. It is a bit of a head-scratcher given that oil only rose 1.3% to roughly $51.50 per barrel, which is quite tame for crude these days -- and still left it half a percentage point in the red for the week. If anything, today's offshore-focused rally seems to be fueled by the optimism that market conditions will improve in 2017 as a result of OPEC's deal to cut its production. 

That said, analysts have a different view, with FBR recently saying that the "cycle will not turn until late 2017" at the earliest. Confirming this view is recent news coming out of the sector. For example, Seadrill Partners received notice late last week that a customer indented to terminate the contract for one of its offshore drilling rigs. While Seadrill Partners has disputed the termination, it is a subtle sign that producers do not seem all that eager to drill offshore, even after the OPEC agreement. Further, that termination is just the latest in a string of contract cancellations or adjustments from oil producers in recent months as they continue to cut offshore investments, which has led to significantly less revenue for offshore drillers like Seadrill Partners and service companies like RigNet. It is a trend that's showing no signs of reversing anytime soon, especially with crude still in the low $50s.

Now what

The market's optimism following the OPEC agreement continues to send oil stocks soaring. That said, the deal needs to push oil prices much higher before it actually leads to an increase in offshore drilling activities -- and therefore a greater workload for RigNet. Further, because shale is so much cheaper and quicker to drill, it will take priority over offshore projects in the near term, which means RigNet might not see any noticeable benefit from the OPEC deal for quite some time.

Matt DiLallo owns shares of RigNet. The Motley Fool recommends RigNet. 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.