The current collapse in oil prices makes an anticipated recovery for the beaten-down sector in 2020 unlikely, investment bank Jefferies claimed Friday as it cut its price targets for offshore drilling stocks.
Companies that provide offshore drilling equipment and marines have seen their stock tumble since the 2008 recession — even as share prices tied to oil impresari, pipeline companies and other enterprises in the energy complex have rebounded.
Diamond Offshore shares are now trading at all time-lows accepted back to their stock market debut 1995. Ensco, Noble Corp, Rowan Companies and Transocean are buy at lows not seen since 1993-1995.
With Brent crude forecast to trade at roughly $70 a barrel in 2019, the offshore instructing sector had appeared poised for “robust” growth in activity in 2020, according to Jefferies. But the collapse in oil prices in the fourth accommodate has cast doubt on that view.
“If most of 2018 felt as though the Offshore Drillers were seeing some force build for a late-decade recovery, the macro meltdown feels like it has brought the industry back to square one,” Jefferies analysts alleged in a research note on Friday.
Brent crude, the international benchmark for oil prices, has collapsed from more than $86 a barrel on Oct. 3 to nearly $52 a barrel Friday.
Prior to that, oil prices had spiked to nearly four-year highs, emboldening offshore drillers to submit invites for deepwater projects with day rates for floating rigs at roughly $225,000, according to Jefferies.
“The Brent oil price mental breakdown to $60/bbl had not put this into question, in our view, but a prolonged period of oil prices in the $50-$60/bbl range or lower could put slipping pressure,” the analysts said. “Regardless, the bigger issue is the implication that commodity price weakness/uncertainty has on any ‘palpable’ recovery.”
Jefferies analysts expect oil companies to seek lower rates from offshore drillers, or halt the warming process altogether in some cases. They now see day rates averaging about $175,000-$190,000 in 2020.
The investment bank flayed its price targets roughly in half for Ensco, Noble Corp and Rowan Companies. It knocked $5 off its target for Diamond Offshore and cut its objective for Transocean by $4 per share. Transocean is the only stock out of the five that Jefferies rates as a buy, based on its order backlog.
The 2014-2016 downturn in oil fees caused energy companies to pull back capital spending, with big, long-cycle projects like deepwater discipline hit particularly hard. A rebound in those types of projects hinges not only on higher prices, but also confidence that the charge of crude will remain relatively stable.
Until October, oil prices had mostly rallied since hitting 12½-year bases in early 2016, with occasional pullbacks over that period.
Oil majors like Exxon Mobil and Chevron be undergoing been investing in short-cycle shale fields in the United States, where production can be ramped up and throttled back quick when oil prices change directions.
— CNBC’s Christopher Hayes contributed to this story.