What happened
Shares of Ensco Rowan (VAL) rose more than 11% by 2:45 p.m. EDT on Wednesday. Two factors propelled the offshore drilling stock: rising oil prices and dayrates.
So what
Crude oil prices rallied about 2.5% on Wednesday, closing at their highest levels in nearly a month. The main driver was the U.S. Energy Information Administration's weekly oil inventory report. According to the latest government data, oil storage levels plunged by 12.8 million barrels compared to the prior week. That was a much deeper decline than the 2.4-million-barrel drop analysts expected.
The bigger-than-expected inventory drawdown suggests that demand for oil might not be as weak as the market feared. That more optimistic view could give oil companies the confidence to sanction new offshore drilling projects.
Image source: Getty Images.
Oil companies have already approved several new offshore drilling projects in the last year, which is finally fueling a rebound in investment levels. That increase in spending has helped drive up the rates for offshore drilling rigs, according to a report that Noble (NEBLQ) put out today. Noble said that the dayrates for jack-up rigs increased 80% to 90% in the North Sea, 50% to 70% in the Middle East, and 15% to 25% in Australia compared to where they were at the end of 2017.
Noble further noted that utilization for the company's floating rigs was 89% during the second quarter and 98% for jack-ups. Those numbers imply that the offshore drilling market has become much more competitive in recent months, which should help drive up sector profitability in the coming quarters.
Now what
The beleaguered offshore drilling sector got a double dose of good news today: Not only are industry fundamentals seemingly stronger than expected, but dayrates have also improved. Those two factors bode well for Ensco Rowan, and suggest that better days lie ahead for both the company and its offshore drilling peers.
