The oil industry had been stuck in a rut for the past several years because it was producing more oil than that market needed. However, thanks to a combination of reduced investment, growing demand, and some help from OPEC, industry fundamentals have improved dramatically over the past year.
Because of that, oil companies are slowly ramping spending back up, and they could make a final investment decision (FID) on 25 to 30 long-term projects this year, including several offshore developments.
It will take some time for these projects to ramp up. However, they're part of the growing evidence that a recovery in the offshore drilling sector is right around the corner.
Revenue should start flowing in a few quarters
Core Laboratories (CLB 2.57%), which specializes in analyzing drilling samples, was one of many oilfield services companies noting that an improvement in the offshore drilling sector is underway. The company stated on its second-quarter conference call that revenue from long-cycle projects like deepwater wells has "been mainly absent from [its] revenue streams dating back to 2015," according to comments by CEO Dave Demshur.
However, he pointed out that the industry has already made an FID on 15 projects this year, which should bolster its revenue late in 2018. Demshur explained why: "Core's revenue opportunity usually occurs three to four quarters after an FID has been sanctioned. Remember: A rig needs to be mobilized, wells need to be drilled, and then cores and fluids can be sampled from the reservoir zones to be analyzed by Core in its reservoir description laboratories."
Because of that lag, the company expects only a modest improvement in earnings and revenue in the third quarter. However, it anticipates that activity sourced from these projects will begin ramping up in late 2018 and into 2019. That leads it to believe that a positive financial impact will start showing up by year end and continue throughout next year.
Starting to see a slight acceleration
Meanwhile, oilfield service and equipment giants Schlumberger (SLB 3.26%) and Baker Hughes (BKR 0.70%) also both noted that they saw the early stages of an offshore drilling rebound. Schlumberger CEO Paal Kibsgaard stated on his company's second-quarter call that "we are starting to see that exploration spend appears to be turning a corner." He noted that "deepwater and exploration is starting to show kind of double-digit growth already in 2018." Furthermore, he said, "I can only see that accelerating going into 2019."
Lorenzo Simonelli, the CEO of Baker Hughes, said something similar on his company's quarterly call, namely that "we expect our offshore production orders to ramp in 2019 as more large projects are sanctioned and offshore spend returns to more normalized levels." And this leads him to believe that "these orders [will] start generating revenues in 2020." While that's a bit further away, it's because the services and equipment that Baker Hughes provides are a bit later in the process than those of Core Labs, for example, which typically can book revenue just a few quarters after an FID.
Offshore drilling contractors, likewise, see the early stages of a recovery forming. Ensco's (VAL) CEO Carl Trowell stated on his company's second-quarter call that "we've seen a renewed sense of optimism toward the offshore sector, as the combination of improving fundamentals and production outages has led to recent Brent crude prices as high as $80 per barrel."
Because of that, Trowell pointed out: "We have also seen an uptick in direct discussions with customers regarding new contracts and extensions of current contracts. Not all of these tenders and inquiries will result in additional work, but we have seen a noticeable shift in our customers' attitudes toward offshore projects recently, which we expect will provide a healthy pipeline of work in the years to come."
It's only a matter of time
The offshore drilling industry takes a lot longer to ramp back up than the onshore sector, so there hasn't been that much improvement even though oil prices have rebounded sharply. However, that pickup isn't far away, since oil companies have already sanctioned several projects that should start up in the next few months, with even more on the way.
Because of that, companies operating offshore should see a noticeable improvement in their results starting early next year, which has the potential to fuel a recovery in their stock prices, too.