Bank Of America On Offshore Drillers: Too Early For Contrarian Bull Call

Douglas Becker of Bank of America believes that despite a recent round of under performance in shares of offshore drillers, further downside is likely possible. In fact, the offshore drillers remain the least favorite oil services sub-sector.

Despite the fact that there have been recent contracts for floaters, the analyst's channel checks conclude that floater dayrates are set to move lower in the coming months.

The analyst believes that a low-specification 10,000' drillship is being offered at $250k/d for a multi-year term. Additionally, a recent eight-month fixture on the Noble Danny Adkins in the Gulf of Mexico was offered at $317k/d, substantially below estimates of $350k/d.

According to Becker, the jack-up market has been more resilient than the floater market. However, recent channel checks indicate rates have fallen to $130k/d, down from recent contracts of roughly $160k/d. The analyst sees delays and attrition over the next three years, reducing the rate even further.

Ratings Changes

“Trading at a forward EV/EBITDA multiple of 5.3x, our offshore drilling universe is slightly below the 5.4x average and midpoint of the 2.5-7.5x historical range since 2006,” Becker wrote.

Shares of Diamond Offshore Drilling DO are Underperform rated with a price target lowered to $32 from a previous $39.

Shares of ENSCO ESV are Underperform rated with a price target lowered to $39 from a previous $45.

Shares of Noble Energy NE are Underperform rated with a price target lowered to $23 from a previous $25.

Shares of Rowan Companies RDC are Underperform rated with a price target lowered to $27 from a previous $28.