This Week in Energy: Freeport-McMoRan Inc (FCX), Exxon Mobil Corporation (XOM), and More

Shares of Transocean LTD (NYSE:RIG) and Seadrill Ltd (NYSE:SDRL) retreated by 6.8% and 9.15% this week mainly due to lower crude prices (which fell around 5%) and a less-than-optimistic Bloomberg article. According to Bloomberg’s Mikael Holter, although many in the industry expect utilization rates to bottom by the middle of the next year, those rates “could be stuck there for a long time” (as the IEA doesn’t expect the oil market to balance out until the middle of next year and Iraq/Iran could continue to ramp up low-cost production beyond that). In addition, rig rates might not rebound as quickly as crude prices. Senior consultant at IHS Tom Kellock was quoted as saying that “rates are going to come back more slowly than oil prices because of the overhang and the degree of competition and the oversupply of rigs, which is not at this stage being tackled”. Various analysts think that the utilization rate needs to reach 70-85% in order for rig rates to start moving up again. For the utilization rate to increase meaningfully, Transocean estimates that the number of working rigs needs to fall to 120 from 160 currently operating.

For a broad-based fundamental recovery to occur, either the current operators need to bite the bullet and remove some of the supply on the market place, or OPEC needs to get its act together and agree with Russia to ‘freeze’ production during their September 26-28 informal meeting in Algeria. However, given the recent joint Russia and Saudi Arabia communique, and the previous announcements from past OPEC meetings, many traders aren’t that optimistic.

Some smart money funds chose to leave the offshore sector in the second quarter. According to our data, the number of funds with holdings in Transocean LTD (NYSE:RIG) fell by seven quarter-over-quarter to 32 at the end of June. Likewise, the number of investors long Seadrill Ltd (NYSE:SDRL) retreated by five to 17 during the second quarter.

Disclosure: None