With oil currently trading below $44 a barrel, there are no doubts that the demand for expensive rigs that can drill wells under thousands of feet of water is falling. 2014 was a tough year for offshore drilling companies, and this year has not been a year for recovery either. Unquestionably, the offshore oil industry has been mainly struck by the falling price of oil. However, many believe that the potential of deep-water reserves and production is way too immense to be ignored. The International Energy Agency has estimated that more than 300 billion barrels of oil can be found under water, greater than the unextracted reserves of Saudi Arabia. The current level of oil prices is not sustainable over the long-run, so sooner or later the commodity’s price will have to settle at a higher level. As a result, the offshore oil industry might get the opportunity to become profitable again. In the following article we will be discussing three underwater drillers that have suffered over the last years, but might get back on track in the years ahead. These offshore drillers include: Diamond Offshore Drilling Inc. (NYSE:DO), SeaDrill Limited (NYSE:SDRL), and Noble Corporation plc (NYSE:NE).
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We will start off by discussing Diamond Offshore Drilling Inc. (NYSE:DO), an underwater driller owned by 20 hedge funds tracked by Insider Monkey at the end of the second quarter. Meanwhile, the value of the stakes in the company amounted to $85.06 million. Unsurprisingly, the company has had a rough year so far, with its shares dropping more than 39% year-to-date. However, the stock seemed to be bottoming-out in August, when it gained slightly over 8%. Diamond Offshore Drilling surprised by market by posting better-than-expected earnings and increasing utilization of its ultra-deepwater and deepwater rings, which represent the most expensive rings in the fleet. The company reported net income of $90 million or $0.66 per share for the second quarter, compared to $90 million or $0.65 per share reported a year ago. This was a surprising improvement for the company given that offshore companies have been struggling to get contracts for their assets as of late. Mason Hawkins’ Southeastern Asset Management is one of the top shareholder of Diamond Offshore Drilling Inc. (NYSE:DO) within our database, holding 1.30 million shares.
Turning our attention to SeaDrill Limited (NYSE:SDRL), a number of 18 hedge funds observed by our team held stakes in the company at the end of the most recent quarter, while the value of these stakes added up to $95.49 million. Seemingly, SeaDrill is in a much worse position than its industry peers, with its shares losing 42% year-to-date. But it is not the stock performance that describes the difficult situation the company is in. SeaDrill’s balance sheet is very weak, as the company used a huge amount of debt to finance its operations. With the falling revenue generated by the company, its accumulated debt of approximately $13 billion is not that sustainable. Even more to that, SeaDrill is currently facing the dilemma of how to pay for its new rigs that are scheduled for delivery through 2017. It is worth mentioning that the company suspended its dividend payments last year in order to combat the relatively low price level of oil. Despite the hazy outlook of the underwater drilling industry, Jim Simons’ Renaissance Technologies increased its stake in SeaDrill during the second quarter to 2.74 million shares.
Lastly, we will take a look at Noble Corporation plc (NYSE:NE), which has seen its stock lose almost 29% since the beginning of the year. The number of hedge funds with long positions in the company increased to 37 from 30 during the latest quarter, whereas the value of these positions decreased to $1.93 billion from $2.37 billion. Credit Suisse recently lowered the price target on Noble to $16 from $18, but maintained an “Outperform” rating. The investment bank suggested that the company has a good portfolio of assets and a good backlog, but may be challenged with a few company-specific risks, including declining ultra-deepwater (UDW) day rates, reducing customer base, accidents, and oil prices and strengthening competition. It is worth noting that Credit Suisse believes that the underwater drilling sector will recover starting from 2018, so only time will show which of the three companies is better positioned to outperform when the oil industry recovers. Steven Cohen’s Point72 Asset Management added a 3.87 million-share position in Noble Corporation plc (NYSE:NE) to its portfolio during the quarter.
Disclosure: None
