Logging While Investing
OFS Weekly Analysis
Jackup demand turning the corner
41 pages. 34 Exhibits, 580 KB
Link: sendspace.com
Excerpt:
Jackup demand turning the corner. Comments from offshore drillers (DO, ESV,
and NE) in earnings season suggest jackup demand has reached an inflection point
in the U.S. GOM and international markets. Despite soft international demand of
81% and scheduled capacity additions (66 jackups in the order book), marketing
teams from several contractors note that international jackup rates appear to have
plateaued in the $85K to $120K range depending on market and contractor's believe
the current rate structure could prove sustainable if oil prices hold near current levels.
Based on ODS data, jackup demand has increased by 4% (+13 units to 330 jackups)
from the August nadir, with higher activity in the Middle East (+6 units), U.S. GOM
(+4 units), and SE Asia (+4 units) offsetting a 1 rig decline in other markets. Drillers
even highlighted the potential for further demand increases in the moribund U.S.
GOM market post hurricane season, with contractors noting interest in 6 to 12 month
term fixtures albeit at rates just above cash cost levels. Please see Rig Bookings at
the top of page 3 for color on last week’s transactions.
3Q09 earnings update. Early into earnings, OFS is delivering more beats than
misses. Offshore contract drillers have beaten estimates handily, generally on higher
Contract Drilling margins (both higher revenues and lower costs), while NBR's miss
was characterized by worse than expected results in all segments except Lower 48
Land. Services have thus far been “theme-less”, with HAL’s revenue strength
internationally, but more margin loss in the U.S. than expected; SLB’s cost control
strength; and WFT’s disappointing revenues and margins.
Our take on the group. Even if we remain wary of the U.S. landscape, we acknowledge
that the 2010 outlook for OFS continues to trickle more positive. As this earnings season
appears to be demonstrating, including via the demand step-up witnessed in the jackup
market, the tone on international spending is improving and we take greater confidence in
an outlook of flat-to-modestly-up spending versus a flat-to-modestly-down spending
outlook previously. The companies are generally exhibiting solid cost control, which lends
itself to some upside bias to our generally still-below-the Street estimates. We continue to
struggle, however, with how much of this better outlook is reflected in shares (and perhaps
has been for some time). This nets to us remaining very selective. In diversified service
large caps, HAL (top pick) and SLB appear reasonably well positioned to outperform. And
we continue to prefer free cash flow generative drillers with healthy deepwater exposure
including RIG and NE. |
