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Offshore Oil Stocks Are Sinking Again as Crude Price War Escalates

By Jason Hall - Mar 11, 2020 at 2:00PM

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The escalations just intensified in the global crude oil price war, with another OPEC heavyweight announcing big output increases to come soon.

What happened

Offshore oil stocks are taking it on the chin once again today. As of 12:49 p.m. EDT on March 11, seven of the biggest offshore drilling and offshore/undersea services providers have seen their shares fall between 7% and 35%. Their losses from their 2020 highs are absolutely staggering, with stock declines between 72% and 91%:

Stock Name Price Change on 3/11 Price Change From 2020 Peak
Diamond Offshore (DO) (15.4%) (80.9%)
Noble Corp (NEBLQ) (13.3%) (83.1%)
Oceaneering International (OII 0.84%) (10.3%) (74.3%)
Seadrill Ltd (SDRL) (7.4%) (75.2%)
Transocean Ltd (RIG 0.00%) (16.5%) (78.8%)
Valaris PLC (VAL) (34.6%) (90.7%)
W&T Offshore (WTI -0.23%) (15.2%) (72.1%)

Prices as of 12:49 p.m. EDT on March 11. Data source: Ycharts.

So what

The stakes in the crude oil price war just got raised even higher. OPEC's third-largest producer, the United Arab Emirates, is joining Saudi Arabia in plans to boost its oil production starting in April.

But that's just part of the news. Saudi Arabia, having already gone scorched-earth with its plan to boost Saudi Aramco's output to 12 million barrels per day and heavy discounts to its crude prices, raised the stakes even further. It now plans to boost production to 13 million barrels per day, which would easily set a new high watermark for its output. 

Worker on an oil platform.

Image source: Getty Images.

And with global oil demand already expected to decline in the first quarter due to the impact of the coronavirus on economic output and global travel, the world is about to become awash in far more crude oil than is actually consumed. There are very real concerns we could be facing a global recession as a result of what has become a pandemic. 

Now what

This all-out price war is changing the landscape for the global oil markets, and producers are scrambling to figure out how to simply survive. The capital spending budgets and operating plans that companies have previously announced are all pretty much out the window now, because even the most conservative of forecasts didn't account for crude prices losing nearly half their value. 

Simply put, the slow recovery we had been seeing in offshore spending will almost certainly reverse course now. A lot of offshore oil that was profitable to develop above $60 per barrel is nowhere close to breakeven today.

Moreover -- and a bigger concern for oil producers right now -- is the stark reality that it takes cash to spend in developing those offshore resources, and sub-$40 oil means much of the industry can't even make enough money to cover their operating expenses and service their debt costs, much less have money leftover to spend on expensive offshore projects. 

Sure, that's a generalization, but it's also the reality the offshore market is now faced with. The minor progress the segment has made over the past couple of years has almost certainly come to a halt for now, and it's very likely that 2020 will be a year of declining offshore activity as the mega-producers reset the market with their devastating pricing power. 

It's unlikely that all of these companies will fail, but it's looking more likely than ever that some will not survive. There will be opportunities to profit, but investors would probably do well to wait and see a little longer before acting. 

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Stocks Mentioned

Noble Corporation plc Stock Quote
Noble Corporation plc
NEBLQ
SeaDrill Limited Stock Quote
SeaDrill Limited
SDRL
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$3.33 (0.00%) $0.00
Diamond Offshore Drilling, Inc. Stock Quote
Diamond Offshore Drilling, Inc.
DO
Valaris plc Stock Quote
Valaris plc
VAL
Oceaneering International, Inc. Stock Quote
Oceaneering International, Inc.
OII
$10.77 (0.84%) $0.09
W&T Offshore, Inc. Stock Quote
W&T Offshore, Inc.
WTI
$4.31 (-0.23%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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