What: Shares of offshore drillers Seadrill Ltd. (NYSE:SDRL) and Atwood Oceanics (NYSE:ATW) are up 16% and 10% at 11:48 a.m. ET on Feb. 29, in a good day for most of the offshore drilling industry's stocks. Seadrill subsidiary Seadrill Partners LLC (NYSE:SDLP) shares are also up today, more than 9% at this writing.
So what: Oil prices are up about 3% today, but there's nothing out there to report that's specific to the offshore drilling sector today. Most offshore drillers reported earnings during February, and while the results across the industry were more or less in line with expectations, there isn't anything earnings-related that's driving today's big stock price jump.
Now what: The hard, cold reality for the offshore drilling sector is this: The vast majority of the operating results that Seadrill and subsidiary Seadrill Partners, Atwood Oceanics, and most of their competitors are delivering right now, and will deliver for the rest of 2016, are still the product of drilling contracts signed in 2014 and before. The bottom line is there is very, very little appetite from the oil and gas producers for expensive offshore development.
And there's very little reason to expect that to change anytime in 2016.
On the most recent earnings call, Seadrill CEO Per Wullf pointed out that offshore drilling activity is at some of the lowest levels since the 1980s right now. Furthermore, there is a massive glut of oil and refined products in storage, and global oil production remains above consumption levels, and it's likely to take most of 2016 for that problem to work itself out -- assuming that supply and demand actually do balance at some point in 2016.
As things stand today, Seadrill has a relatively secure backlog with enough contracted business to ride out the next year or so, as well as more than $1 billion in cash on the balance sheet that should further help it cover costs if the downturn extends beyond 2016.
Atwood, on the other hand, has less than $12 million in cash, and its backlog offers it much less security, with only around $605 million in after-tax cash flows under contract today and only two of its vessels currently under contract beyond this year. But even Atwood's situation isn't as dire as that makes it sound, since the company has a much more manageable debt profile than Seadrill's and $600 million in available liquidity via its revolving credit instrument.
Demand for offshore drilling will eventually recover, as those reserves become necessary sources of energy, and oil prices rebound enough to support investment in developing them. Just don't count on the recovery happening anytime soon. Days like today are nice if you own shares of these stocks, but the offshore drilling industry, frankly, is in disarray, and it's going to be quite some time before that changes.
Jason Hall owns shares of Seadrill. The Motley Fool owns shares of and recommends Atwood Oceanics. 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.