What: Offshore drilling stocks are sinking along with the price of oil today. Seadrill (NYSE:SDRL) and Ocean Rig (NASDAQ:ORIG) were among the hardest hit, with their stocks down 17.9% and 10.1%, respectively, at 3:15 p.m. EST.
So what: Today's move in the offshore sector is mostly tied to crude oil prices, with crude ending down almost 6% to nearly $37.50 per barrel. That oil price is just too low for oil companies to continue to explore for oil in deepwater locations, which in many cases need oil to be $75 or more per barrel to earn an economic return.
The implication here is that rigs owned by Seadrill and Ocean Rig will have a tough time finding work when they come up for contract renewals. Furthermore, what work is doled out will likely be at a much lower dayrate than these companies are used to earning. For example, earlier today Transocean (NYSE:RIG) announced that it was awarded a two-year contract for one of its rigs. However, the award was at a $275,000 dayrate, which was substantially below the prior dayrate range of $347,000 to $476,000 that Transocean had been earning on that rig.
Falling oil prices and dayrates are of dual concern to a company like Seadrill or Ocean Rig. First, falling dayrates have the potential to reduce the cash flow that comes into these companies' coffers, which will make it tougher for them to maintain heftier debt levels. In addition to that, the dayrate slide is reducing the value of offshore fleets, which not only weighs on an offshore driller's ability to match its asset value with its debt levels, but would make it harder for a company to sell vessels in the future to bolster its balance sheet.
Now what: Offshore drillers are facing a very uncertain future because the current oil price is too low for oil companies to consider investing in new offshore projects. That its putting tremendous pressure on dayrates, and therefore the value of drilling rigs and offshore drillers stock prices. With no end to the oil-price volatility in sight, investors just need to sit tight.
Matt DiLallo owns shares of Seadrill. The Motley Fool recommends Seadrill. Try any of our Foolish newsletter services free for 30 days. 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.