Last week, Barclays issued a very bearish report on offshore drillers, including Transocean (RIG), Seadrill (SDRL) and Atwood Oceanics (ATW). This week, Raymond James added its voice to the growing chorus of naysayers.
Associated Press Raymond James analyst Collin Gerry and team explain why they’re bearish in the short-term–and why it’s too early to step in and buy:
Welcome to a typical oilfield cycle: step 1) attractive newbuild returns entice new capacity; step 2) newbuild capacity delivers as demand begins to soften; and step 3) pricing and utilization suffer. This is not new to the oilfield services sector and it appears the offshore drillers are set to experience a cyclical downturn. Over the past several years, the market has easily absorbed robust newbuild activity without affecting pricing. Going forward, demand growth is decelerating as newbuild supply is accelerating which likely creates utilization and pricing sloppiness.
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Though stocks are screening cheaper, we believe it is too early to step in and buy: Are we piling on too late? Honestly, kind of. Offshore drillers already underperformed the OIH by 20% since late 2012. However, valuations currently offer little downside support. In addition, we fear the headline risk of continued dayrate and utilization sloppiness. Longer term: It is very important not to abandon this space.
As a result, Gerry cut Atwood Oceanics, Ensco (ESV) and Noble Energy (NE) to Market Perform from Outperform. He raised Rowan (RDC) to Outperform from Market Perform. Rowan was also a favorite of Barclays.
Shares of Atwood have dropped 4.3% to $45.35, while Ensco has fallen 2.1% to $49.30, Noble has declined 1% to $30.72, Rowan has ticked up 0.1% to $31.41, Seadrill has dropped 0.7% to $35.46 and Transocean is off 1.9% at $42.48.
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