Oil price 'meltdown' puts offshore drilling stocks 'back to square one,' analyst says

Key Points
  • Jefferies cuts its price targets for offshore drilling stocks, saying the collapse in oil prices means a recovery for the beaten-down sector now looks unlikely.
  • Companies that provide offshore drilling equipment and services have seen their stock prices tumble since the 2008 recession.
The Sedco 714 oil platform, operated by Transocean Ltd., stands in the Port of Cromarty Firth in Cromarty, U.K.
Matthew Lloyd | Bloomberg | Getty Images

The recent collapse in oil prices makes an anticipated recovery for the beaten-down sector in 2020 unlikely, investment bank Jefferies said Friday as it cut its price targets for offshore drilling stocks.

Companies that provide offshore drilling equipment and services have seen their stock tumble since the 2008 recession — even as share prices tied to oil producers, pipeline companies and other enterprises in the energy complex have rebounded.

Diamond Offshore shares are now trading at all time-lows going back to their stock market debut 1995. Ensco, Noble Corp, Rowan Companies and Transocean are trading at lows not seen since 1993-1995.

With Brent crude forecast to trade at roughly $70 a barrel in 2019, the offshore drilling sector had appeared poised for "robust" growth in activity in 2020, according to Jefferies. But the collapse in oil prices in the fourth quarter has cast doubt on that view.

"If most of 2018 felt as though the Offshore Drillers were seeing some momentum build for a late-decade recovery, the macro meltdown feels like it has brought the industry back to square one," Jefferies analysts said 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 about $52 a barrel Friday.

Prior to that, oil prices had spiked to nearly four-year highs, emboldening offshore drillers to submit bids for deepwater projects with day rates for floating rigs at roughly $225,000, according to Jefferies.

"The Brent oil price collapse 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 downward pressure," the analysts said. "Regardless, the bigger issue is the implication that commodity price weakness/uncertainty has on any 'real' recovery."

Jefferies analysts expect oil companies to seek lower rates from offshore drillers, or halt the tendering process altogether in some cases. They now see day rates averaging about $175,000-$190,000 in 2020.

The investment bank slashed 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 target 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 prices caused energy companies to pull back capital spending, with big, long-cycle projects like deepwater drilling hit particularly hard. A rebound in those types of projects hinges not only on higher prices, but also confidence that the cost of crude will remain relatively stable.

Until October, oil prices had mostly rallied since hitting 12½-year lows in early 2016, with occasional pullbacks over that period.

Oil majors like Exxon Mobil and Chevron have been investing in short-cycle shale fields in the United States, where production can be ramped up and throttled back quickly when oil prices change directions.

— CNBC's Christopher Hayes contributed to this story.