Global Hunt for Crude Sends Offshore Oil Stocks Soaring
8:00 am ET July 24, 2023 By Bob Henderson WSJ
Offshore oil stocks are pumping out big gains, lifted by investors betting the future of energy production lies in deep water.
Shares of firms that drill and service offshore oil and gas wells have surged about 35% so far this year, outpacing the S&P 500’s 18% climb. The gains come even as sagging fossil-fuel prices have dented the shares of producers such as Exxon-Mobil and Chevron and dragged the S&P 500 energy sector down 4.1% for the year, among the worst performing groups in the index.
The offshore club includes contractors such as Noble and Transocean that lease drillships and other rigs to producers, and whose stocks have climbed by 36% and 78% respectively since December. It also includes TechnipFMC, which fashions plumbing for underwater wells, and Oceaneering International, which rents robotic vehicles to service such wells, which have notched gains of 43% and 32% respectively.
The companies are profiting from a Rising global demand for petroleum boom that has been building steam since 2021 and which has recently spawned a series of eye-popping contracts with producers. drove many drillers into bankruptcy. Rising global demand for petroleum and a growing recognition that an increasing fraction of the world’s fossil fuels will come from underseas are keeping contractors busier than they have been since 2014, when an oil crash sparked a seven-year downturn that drove many drillers into bankruptcy.
Ocean rigs are scarce, and rates are rising sharply. Transocean’s stock jumped nearly 7% last Tuesday after the company reported a three-year, $518 million contract to deploy one of its drillships in the Gulf of Mexico. The deal was the latest in a series of large transactions announced over the past two months that will pay drillers $480,000 a day or more for their rigs, roughly 50% higher than a year ago and about triple the downturn’s lows.
Oil-and-gas producers are scrambling for rigs and booking them increasingly far in advance, said Dave Smith, an equity analyst at Pickering Energy Partners. Some recent deals don’t start until 2026 and some producers are looking to lock in rigs as far as 10 years into the future.
“It’s not just one place. It’s West Africa, Brazil, Southeast Asia,” said Smith. “They don’t know what oil prices will be in 2026, ’27, ’28. But they’re still willing to commit to the rig right now to ensure they have it.”
Noble recently announced that it was initiating the first quarterly dividend of any offshore driller in years. Transocean—a rare driller to have avoided bankruptcy during the crisis—has been paying down debt and has said it is aiming to reduce its remaining debt of about $7.6 billion by as much as $3 billion.
The U.S. shale boom has driven global oil supply growth for much of the past decade, but appears to have passed its prime, said Rebecca Babin, senior energy trader at CIBC private wealth. The need to compensate for a recent lack of investment could also power the current upturn for at least another five to seven years, she said.
“People are starting to pay a lot more attention to offshore,” Babin said. “There’s money flowing into it, and it’s a hotter topic than it’s been in years.”
Cash is chasing opportunity. Forty of the top 50 hydrocarbon discoveries made since 2010 are offshore according to consulting firm Rystad Energy, and undersea reserves account for nearly 70% of newfound, non-shale resources in the past few years. Rystad estimates annual investment in offshore exploration and production to balloon to over $200 billion over the next few years, the highest since 2016.
Major offshore oil and gas finds have been made in Brazil, Guyana, Namibia, Egypt, Israel and Cyprus in recent years. Earlier this month, a Norwegian oil company announced that it had made the largest hydrocarbon discovery on Norway’s continental shelf since 2013.
National oil companies including Saudi Arabian Oil, or Aramco, and Brazil’s Petróleo Brasileiro, known as Petrobras, have aggressively ramped up their offshore activity and now account for most of the investments being made.
But big public players are also seeking to bolster their long-term resources. Exxon-Mobil leads a consortium drilling one of the world’s biggest reserves off the coast of Guyana. European majors BP and Shell are expanding production in the Gulf of Mexico, having recently re-emphasized fossil fuels over renewables.
To be sure, sliding oil and gas prices have led onshore drillers to idle rigs recently. Energy stocks are often volatile because they can swing with the price of oil and many posted large gains last year that analysts say could unravel if crude slides further.
But the long-term nature and robust economics of offshore projects makes them less far vulnerable to market volatility, said Kurt Hallead, an equity analyst at The Benchmark Company.
Eighty-five percent of planned projects over the next few years are viable at oil prices below $50 a barrel, according to oil-services giant SLB. Brent crude, the international benchmark for petroleum pricing, is currently trading for about $81 a barrel.
“It makes sense all day long for these companies to put money into offshore projects,” said Hallead.
Even offshore club members that don’t rent rigs, such as TechnipFMC, are benefiting from extended project timelines. The company’s chief executive officer, Douglas Pferdehirt, speaking at a conference last month, said he expects his company’s subsea revenue to exceed $25 billion over the three years between 2023 and 2025, and that it is already racking up orders as far out as 2030.
“The party is not over in 2025,” he said. |
