What happened
Shares of offshore drillers Valaris (VAL +0.00%), Diamond Offshore Drilling (DO +0.00%), Seadrill (SDRL +0.00%), and Transocean (RIG +1.51%) were down between 5% and 6% at 12:47 p.m. EDT on Sept. 17. This big sell-off came after yesterday's massive run-up, which saw this same group gain between 6% and 21%.
Image source: Getty Images.
So what
Yesterday's surge and today's sell-off are two sides of the same coin, as investors try to process and predict the implications of this weekend's attacks on Saudi Arabia's Abqaiq oil-processing facility. The drone strikes, which are purported to have come from Yemeni Houthi rebels -- possibly backed by Iran and potentially being launched from Iranian soil -- have temporarily halted about half of Saudi Arabia's entire oil production, and impacted a massive 5% of global oil supplies.
Yesterday, investors seemed ready to pile into anything oil-related, looking for a way to profit as crude oil prices skyrocketed 15% higher in a single day. Along with offshore drillers, many U.S. oil stocks surged upwards by double digits on Sept. 16 as well.
Like yesterday's offshore drillers, these same stocks are giving back much of their gains today, as investors either cash out after yesterday's surge, or simply follow crude-oil prices lower. Brent and West Texas Intermediate crude prices are down 4.7% and 4.5% respectively at this writing.
Now what
Yesterday and today are solid reminders that investing in the energy sector is complex, and the risks are complicated by global politics, conflict, and events that are completely outside the control of any company in the industry. Moreover, single-day movements up and down like this can make it much harder to ride out uncertainty, particularly if you don't understand the factors behind a particular company's or sector's results.
And in the case of offshore drillers, to put it bluntly, yesterday's massive oil price swing -- specifically, its cause -- isn't likely to prove a durable advantage. Yes, higher oil prices are "good" for offshore drillers, since those prices enable oil producers to generate higher returns from expensive, time-consuming offshore oil reserves. However, even though the Abqaiq facility outage will likely be prolonged, and oil prices should stay higher as a result, it's incredibly unlikely it will result in new large offshore oil projects getting the green light.
Now for the "good" news: The offshore drilling sector was already showing strong signs of recovery. After multiple years of contraction, spending is already increasing, and day rates -- how much drillers charge for their services -- are going up as rig supply finally is starting to tighten.
Those are two big positives for the sector, and in particular the four companies mentioned above. The entire industry has gone through massive changes since 2014: Hundreds of older vessels were scrapped; many of the weakest companies are no longer in business; and all of the top names were merged with or scooped up some of the better fleets at bargain prices, emerging from the downturn stronger and leaner.
Based on those factors -- not to mention the bargain prices these stocks trade for, based on the value of their assets -- investors willing to ride out the volatility we've seen this week, and able to hold for multiple years, should do well to own a basket of these top offshore drillers.
