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Offshore Driller Stocks Offer Tremendous Upside

By Joel South and Taylor Muckerman – Jan 29, 2014 at 10:11AM

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Recent downgrades and excess crude supply are oversubscribed, offering buy-and-hold investors a nice opportunity to access offshore drillers.

If you tuned in to any media outlets this past year, you likely heard how much oil the world is producing, with OPEC pushing through its 30 million barrels per day production cap in addition to the United States reaching 30-year highs in oil production.

With excess supply in the short term, some analysts are questioning the long-term viability of expensive and dangerous deep water drilling. A number of investment banks have downgraded the biggest offshore drillers, including Transocean (RIG 6.20%), Ensco (VAL) and Noble Corp. (NEBLQ), sending all three lower this past quarter. 

RIG 3 Month Total Returns Chart

Source: YCharts

Again, shortsightedness is extremely dangerous, and today's discounted share price offers opportunities for buy-and-hold investors. The recent downgrades for large offshore drillers sight short-term softness in the deep water vessel market, suggesting utilization rates among older ships will be lower for the first half of 2014. As for the over supply of oil, Steven Kopits from Douglas-Westwood consultancy, reminds us that history has shown excess oil is quickly absorbed, with the supply-and-demand balance in crude oil consistently reverting back to its equilibrium. Spending in the offshore drilling market is estimated to double by 2020, and oil prices are still hovering around the $100-per-barrel mark. While some traders are buying into short-term fear, investors looking for oil investments have an opportunity to buy solid companies at a discount.  

This segment is from Tuesday's edition of "Digging for Value," in which sector analysts Joel South and Taylor Muckerman discuss energy and materials news with host Alison Southwick. The twice-weekly show can be viewed on Tuesdays and Thursdays. It can also be found on Twitter, along with our extended coverage of the energy and materials sectors @TMFEnergy.

Joel South has no position in any stocks mentioned. Taylor Muckerman owns shares of Ensco. Taylor Muckerman owns shares of Ensco. The Motley Fool owns shares of Transocean. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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