Please ensure Javascript is enabled for purposes of website accessibility

Here's Why These 3 Offshore Drilling Stocks Sank 16% or More Last Month

By Jason Hall – Sep 12, 2017 at 10:02PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ENSCO, Atwood Oceanics, and Noble Corporation stocks fell sharply in August on continued concerns about the near-term prospects for offshore drillers.

What happened

August was another tough month for offshore drilling stocks. Shares of ENSCO PLC (VAL)Atwood Oceanics, Inc. (ATW), and Noble Corporation Ordinary Shares (UK) (NEBLQ) all fell sharply during the month, finishing August down 19%, 16%, and 18% respectively. 

In general, a lack of good news was responsible for the decline in shares of these three companies in August, including the release of quarterly earnings in late July and early August. 

Graphic of offshore underwater oil pipes.

Image source: Getty Images.

So what

Noble Corporation reported second-quarter results in early August. Not only did its results deteriorate from the year before, but also sequentially. Revenue fell almost 25% from the first quarter, while it reported a $44 million operating loss after delivering $46 million in operating income in the first quarter. Even the one "positive" from its results and narrowing of its net loss from $302 million in the first quarter to $93 million in Q2 wasn't because of operating improvements, but was tied to mostly non-cash expenses in the first quarter. 

ENSCO reported earnings near the end of July, and the story was similar to Noble's in that it reported sequential and year-over-year deterioration in its revenue and operating results. However, while Noble reported an operating loss in the second quarter, ENSCO generated a $27 million operating profit. 

Atwood Oceanics also reported weaker revenues sequentially and year over year, driven by the same trend as its peers: The end of drilling contracts during the quarter, without new work to replace it. 

Now what

It feels like the hundredth time I've written these words, and they are still true: The rest of 2017 is probably going to be generally bad for offshore drillers. Oil and gas producers aren't deviating much at all from their capital spending budgets for 2017, and as we learned before the start of the year, offshore investment is almost assuredly going to be down yet again for the full year. There has been little new work to be had, and almost all of that new work is short-term extensions -- think a single well, or a few months of exploration -- of existing contracts. 

But we have evidence that the spending freeze is thawing. ENSCO signed 12 new contracts during the second quarter, half of which were multiyear agreements. Other competitors have also secured long-term work in 2017, but it's important to note that the majority of the new long-term contracts signed this year are for activity that won't begin until next year, or even after. 

For ENSCO -- and Atwood Oceanics, which has agreed to be acquired by ENSCO -- the future is tied to its ability to continue to ride out the downturn. This will be in part accomplished by relying on its $1 billion in cash and $2.25 billion available credit as a combined company, as well as plans to lower expenses by decommissioning its oldest, non-competitive vessels as they come off contract. 

Noble, on the other hand, hasn't signed much new work this year, but this could be by design. The company has one of the best contract backlogs in the industry, which has helped it to remain cash-flow positive during almost every quarter of the downturn, and it also meant it hasn't had to race to the bottom to win contracts at barely cash-flow breakeven rates. That backlog won't last forever, but it has certainly allowed the company to ride out the worst offshore downturn in history. 

Looking ahead at 2018 and beyond, the combined ENSCO/Atwood Oceanics and Noble Corp are both very likely to be able to ride out the downturn -- and be important players in the eventual recovery of offshore investment. And with shares trading for less than 20% of book value, I think patient investors willing to buy at these prices and ride out the downturn should do incredibly well. 

The catch? The downturn should start to break next year. But as this downturn has reminded us multiple times already, it could also take even longer to bounce back. And the opportunity cost of having to wait even longer than expected for the upturn is a factor investors have to consider. 

Jason Hall owns shares of Atwood Oceanics, Ensco, and Noble. The Motley Fool owns shares of Atwood Oceanics. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Atwood Oceanics, Inc. Stock Quote
Atwood Oceanics, Inc.
Noble Corporation plc Stock Quote
Noble Corporation plc
Valaris plc Stock Quote
Valaris plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.