Please ensure Javascript is enabled for purposes of website accessibility

Offshore Drilling Stocks Surge After Saudi Oil Facility Attack: Here's What You Need to Know

By Jason Hall – Updated Sep 17, 2019 at 8:16AM

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

Higher oil prices resulting from a prolonged outage from one of the world's biggest sources improve the prospects for offshore oil. At least that's what Mr. Market seems to think today.

What happened

Shares of most of the world's biggest offshore drillers are rocketing higher today following attacks over the weekend on Saudi Aramco's Abqaiq oil processing facility, which immediately impacted a massive 5% of global oil flows and sent crude oil prices gushing higher. As of 12:28 p.m. EDT, both Brent and West Texas Intermediate crude oil benchmarks were up 12%. That is a massive gain for oil prices in a single trading day, demonstrating how enormous the potential implications could be for global oil markets. 

An explosion and fire at an oil facility.

Image source: Getty Images.

Investors looking to profit from energy have moved quickly. Higher oil prices have shares of Valaris (VAL)Transocean (RIG -0.40%), and Diamond Offshore (RIG -0.40%) are up 16.2%, 11%, and 10.7%, while Seadrill (SDRL) shares are up 5.7%. In pre-market trading, they were all well above 10%, with shares of Valaris surging as much as 25% before the official open. 

So what

It's still early in the story, but Saudi Aramco reportedly immediately shut down half of its total oil production as it assesses the damage at the Abqaiq processing facility and determines how much -- and for how long -- its output will be impacted. 

There's some expectation that one-third of the facility's production capacity would be brought back online as soon as today, there remains substantial uncertainty surrounding the vast majority of its processing capacity. And that could have a profound impact on global oil supplies in the months to come. 

Now what

How does all of this affect offshore drillers? On the one hand, higher oil prices are generally a good thing for offshore oil. These resources require far more up-front capital to develop, so being able to realize a higher selling price increases the payoff.

On paper, that's excellent for offshore's prospects. The rub is, investors shouldn't expect oil producer executives to call emergency meetings to approve more spending to develop offshore resources. Simply put, even a needle-moving event like this weekend's attacks may not prove a sustainable catalyst for offshore development. 

The immediate beneficiaries are likely to be U.S. onshore oil producers, which can begin immediately realizing the benefits of today's huge jump in oil prices. 

But that's not to say that today's surge makes offshore a bad investment. To the contrary, I'm bullish on the sector and think it's generally still undervalued even after today's big price gains. Producers have steadily increased their commitments to developing offshore resources, and higher oil prices should only help them remain committed to those investments. 

Here's the catch: If you invest in any offshore drilling stock, be prepared for more future volatility, including potentially big down days, especially if Saudi Aramco is able to quickly bring Abqaiq back on line. If you're willing to ride out those ups and downs, and also able to take on some risk that offshore doesn't continue to rebound, I think the entire sector makes an excellent risk/reward investment over the next three to five years. 

Jason Hall owns shares of Transocean and Valaris plc. The Motley Fool has no position in any of the stocks mentioned. 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

Transocean Ltd. Stock Quote
Transocean Ltd.
$2.47 (-0.40%) $0.01
SeaDrill Limited Stock Quote
SeaDrill Limited
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 10/01/2022.

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.