Attacks on Saudi Aramco's Abqaiq oil processing facility over the weekend are playing havoc with global energy markets. Major crude oil benchmarks are up more than 14%, with as much as 5% of the world's oil output now in question as Saudi Aramco determines the extent of the damage and how long it will take to resume processing at one of the world's biggest crude oil processing facilities.
This has many oil stocks gushing higher as well. U.S. oil producer stocks are going ballistic, and for good reason, since many will see an immediate benefit from today's massive gain in oil prices directly on their bottom lines. Many offshore drilling stocks are also surging higher, as energy investors correlate higher oil prices with improved prospects for one of the most beaten-down sectors of the energy market.
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Yet while many of its peers' stock prices surge higher, Noble Corp.'s (NEBLQ) shares are barely up 2% in afternoon trading. Moreover, the offshore drilling specialist's shares were even down at one point earlier in the day:
Why isn't Noble Corp getting the same positive attention as its peers today? After all, aren't rising oil prices supposed to be the tide that lifts all offshore drilling rigs? Let's take a closer look at what's happening with oil markets and Noble and what investors should expect going forward.
When everyone else's good news is your bad news
Noble's biggest customer (in terms of total rigs employed) just so happens to be the victim of this weekend's attacks: Saudi Aramco. Of the 25 vessels listed on Noble's September fleet status report, 5 are under contract with the Saudi Arabian oil behemoth.
Yes, there's some near-term risk for Noble here, particularly if a prolonged Saudi outage causes it to not extend contracts with Noble that are set to expire in the near term on one jack-up vessel. Moreover, Noble has contracts expiring on a number of floating vessels not under contract with Saudi Aramco, creating further uncertainty about its cash flows heading into 2020.
Looking at the bigger picture
It looks like investors' rush to buy offshore drilling stocks today isn't particularly aligned with how offshore development works. Higher crude prices should result in more offshore oil investment, but only so long as it's sustained. Offshore projects require substantial up-front capital and take a lot of time to develop, and it seems likely that other sources -- primarily U.S. onshore shale -- will bridge much of the near-term gap in global oil supplies while the Abqaiq outage is resolved.
And most likely, we are talking in terms of months -- not years -- for Saudi Aramco to get its oil production back to recent levels. That means investors shouldn't count on today's oil price surge creating any durable benefit for offshore drillers.
But with that said, I don't think offshore needs something like the outage at Abqaiq to sustain its prospects. There has already been measurable improvement in the sector over the past couple of years as more projects get green-lighted for investment.
Opportunity from mismatched expectations
Noble, within all the noise of today's volatility, looks particularly interesting. Energy investors looking for profits are thinking very short term today, ignoring the realities around offshore that take multiple quarters and even years to play out.
Oil producers have made significant commitments to offshore over the past year, and 2019 is well on its way to being the biggest year for new offshore project approvals in nearly a half decade. And while that's good for the sector as a whole, I think investors looking for potential investments in offshore would be remiss to overlook Noble because of its exposure to Saudi Aramco.
