After spending the last year in a slump, crude oil prices are showing the early signs of a rebound thanks to supply disruptions, rising global demand and OPEC+ production cuts.
Recent Commitments of Traders reports showing a big increase in net long positions in the oil patch among hedge funds and money managers following a spate of constructive developments in the energy sector.
New fiscal stimulus measures from China have contributed to the newfound enthusiasm. The world’s biggest crude importer rolled out a plan to “restore and expand” consumption, replete with interest rate cuts and the possibility of billions of dollars in new infrastructure spending, which should increase oil demand.
Closer to home, the U.S. Energy Department recently announced plans to purchase about six million barrels of oil for the Strategic Petroleum Reserve, with receipts scheduled for later this year.
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Meanwhile, on the supply side, lower production in major overseas markets points to tighter oil markets in the coming months. Russia will cut oil exports by over two million tons in the third quarter, while top exporter Saudi Arabia has extended its unilateral one million barrel-per-day production cut into August.
In light of these bullish developments, several major energy companies are planning ocean exploration and drilling programs as offshore activity heats up around the world. The new projects make sense, as chief analyst Mike Cintolo observed in a recent issue of the Cabot Top Ten Trader, “Deep-sea activity offers long-lasting, cost-effective wells for big players.”
While drilling activity in North America has been described as “tepid,” offshore drilling is currently enjoying something of a renaissance, thanks to a revival of demand in foreign markets and an intensifying hunt for new deposits after the Russia/Ukraine war disrupted the flow of oil. Commenting on the offshore opportunity, oil service leader Schlumberger (SLB) predicted major oil firms would commit up to $500 billion in new projects in the next three years, further noting that 85% of offshore fields are profitable even if oil prices fall to under $50 per barrel.
The above-mentioned factors explain why companies that specialize in serving the offshore energy production industry are outperforming right now. Here we’ll look at three attractive players in this market which are primed to benefit from additional oil market strength.
3 Oil Patch Outperformers
Diamond Offshore Drilling (DO) is a global leader in contract drilling services for the energy sector, with a total fleet of 12 offshore drilling rigs, consisting of eight semisubmersibles and four drillships.
The company reported a 70% revenue increase, plus a huge earnings beat, in Q1 as ultra-deepwater contracting activity picked up. Management believes it’s in the midst of a “broad-based upcycle” as demonstrated by increased demand for drill ships and semi-submersibles across multiple regions, plus tendering activity for longer-term prospects. The firm subsequently expects EBITDA and cash flow to further improve in the coming quarters.
It’s worth noting that Barclays analyst David Anderson, who sees offshore drillers as the most attractive area of the oilfield service group, just rated Diamond Offshore as a top pick in this group, as its smaller size could make it an attractive acquisition target.
SeaDrill Ltd. (SDRL) is an offshore and onshore oil and gas contractor which operates in a number of strategic petroleum basins around the world. Its fleet consists of 21 rigs with an average age of 11 years, making it one of the world’s youngest and most technologically capable fleets.
Echoing comments made by the top brass of its leading competitors, SeaDrill management has expressed optimism about market developments in offshore drilling and believes it’s in the “constructive early stages of a multi-year upcycle.”
Analysts expect a whopping 45% top-line increase for this year, as the offshore activity continues to increase in the face of a tightening supply outlook.
Tidewater (TDW) is a leading global purveyor of larger offshore support vessels and marine support services to the global energy industry. The company also provides services in support of offshore crude oil and natural gas exploration, field development and production, as well as wind farm development and maintenance, including towing of and anchor handling for mobile offshore drilling units.
A testament to the recovery in the offshore market—global average day rates increasing to the highest level since 2015—is Tidewater’s Q1 results, which featured the highest quarterly sales and adjusted EBITDA in over seven years. Revenue of $193 million increased 83% from a year ago in Q1, with EBITDA rising to nearly $60 million (up 170%).
The sanguine results, along with the rising day rates, prompted at least two major Wall Street institutions to boost their ratings for the company. Tidewater underscored this trend, noting that across every region and in almost every vessel class, “significant day rate expansion” was seen in the quarter, with a lack of available offshore vessels against a backdrop of growing demand expected to continue pushing up global average day rates in the coming quarters.
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