Zacks: Worst still to come for offshore drillers

The latest spate of fleet status reports – with news of low dayrates and contract terminations – provide further evidence that being an offshore driller is just not fun right now, Zacks Equity Research writes in its blog.

Year-to-date, shares of major companies have significantly underperformed the broader market. In particular, stocks of Transocean Ltd.  and Diamond Offshore Drilling Inc. are down approximately 21% and 22%, respectively, while the broad-based S&P 500 index has gained 9% over the same period.

What’s more, according to some analysts, the worst is still to come for these drillers.

The most pressing concern for the group, at least in the short-term, will be oversupply in the rig market. With large, multinational energy firms looking to reign in their skyrocketing capital expenses, the offshore drilling space is likely to see intense competition, as multiple firms chase a single contract.

This excess capacity, in turn, could lead to lower utilization or dayrates.

Secondly, the offshore contract drilling industry is perceived to be a highly cyclical one and the current thought is that rates had already peaked for this cycle back in late 2013. As the sector looks set to enter a cyclical downturn, drillers will prefer to hold on to their higher technology specification rigs, thereby significantly denting the company’s fleet utilization and profitability.

Last but not least, while most of the drillers boast of billion dollar revenue backlogs, they are struggling with idled rigs – or the ones without contracts – in a slack market. On an average, just about two-thirds of available deepwater rigs for 2015 have been able to find customers. Even for this year, a number of drilling rigs remain uncontracted.

Worryingly, investors do not see an immediate rebound in the sentiment and expect more punishing times ahead. In particular, companies with Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like Parker Drilling Co. , Vantage Drilling Co. and Noble Corp. look to be in most trouble. These drillers have negative returns year to date and has been witnessing downward earnings consensus estimate revisions for the current quarter and year.