Raymond James Maintains Bearish Stance on Offshore Drillers, Upgrades RDC, Downgrades ATW, ESV, NE
In Raymond James' Morning note on Monday, analyst Collin Gerry recommended an Underweight bias towards the offshore drillers sector. Gerry reduced 2015 estimated EPS by approximately 18%. The analyst noted that this a typical cyclical slowdown and not a permanent slowdown. In his industry overview report, Gerry wrote that he is “Highly Confident the Market Will Return.”
Collin Gerry wrote, “We estimate the industry needs to cold stack ~6% of both the floater and jackup fleet over the next three years to maintain 90% utilization. Assuming the pace of newbuilds slows, this should improve the supply/demand dynamics by 2017. Additionally, the floater market has endured a two-year hiatus from the largest deepwater drilling region in the world, Brazil. As its locally-built Brazilian rigs get closer to the delivery table in 2016, we expect Brazil can return to a modest growth rate.”
Raymond James downgraded Atwood Oceanics (NYSE: ATW), Ensco plc (NYSE: ESV) and Noble Corp. (NYSE: NE) from Outperform to Market Perform. Gerry remarked that offshore stocks are in “full-blown meltdown mode.” The analyst commented, “The market is clearly shooting first and asking questions later, as evidenced on January 23 when Noble Corp reported a decent quarter yet the offshore space declined 5-9% due to management's sobering short-term commentary. A basket of offshore drillers underperformed the OIH by 15% in 2013. So far this year, the group is underperforming by 9%. DO's stock price is already below the low set during the 2009 financial crisis. RIG's stock price is approaching 2009 and Macondo- driven lows.”
The analyst noted that higher spec assets should do well and reiterated an Outperform rating on Pacific Drilling S.A. (NYSE: PACD), Ocean Rig UDW (NASDAQ: ORIG), and Rowan Companies plc (NYSE: RDC) “given the high spec nature of the fleets”. Gerry noted that these three drillers “would be on the top of any acquirer's list.” Raymond James lowered the price target on Pacific drilling from $14.00 to $11.50 and on Ocean Rig from $26.00 to $20.00. The analyst established a $35.00 price target on Rowan Companies.
Raymond James Maintains a Market Perform rating on Diamond Offshore Drilling (NYSE: DO), Transocean (NYSE: RIG), and Hercules Offshore (NASDAQ: HERO). The analyst noted that “lower quality assets are too risky as we head into a sloppy market.” Gerry commented on the significant size of Diamond Offshore and Transocean's MW fleet and DW exposure. Raymond James added that it is possible to see more disappointment for Hercules as most of the fleet is made up of legacy/standard rigs (with the exception of Resilience and Triumph).
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