Drillers Smashed On Deutsche Bank Sector-Wide Downgrades

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Drillers are selling off sharply following a bearish report from Deutsche Bank. The industry has gained some traction recently as investors collect dividends and wait for a turn around.

Deutsche Bank thinks this is a fault, focusing specifically on fleet recapitalization: “We strongly disagree and believe the market is mistaking a wholesale recapitalization of the offshore rig fleet for a more benign cyclical downturn.”

The research house sees 13 percent downside in the industry. The note discusses weakness in both floaters and jack-ups.

The floater market is under pressure, while demand growth is paused (but may resume) and supply continues to increase.

“It is difficult to stimulate additional demand through lower rates and many 4th/ 5th generation units are perfectly capable of drilling the wells targeted by newbuilds and will therefore continue to price down to capture a relatively static demand pool.” Most pressure will be put on older units.

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Deutsche Bank also thinks the jack-up market is in a tough position, despite popular opinion. Analyst Mike Urban wrote, “While demand is more elastic and continued high oil prices should continue to support strong levels of activity, supply growth begins to accelerate dramatically in the 2nd half of this year and continues through 2017.”

Rating Changes

Noble Corp NE downgraded from Buy to Hold, price target cut from $50 to $28. Shares down 12.5 percent.

“While we do not think the market is giving the company full credit for its fleet transformation, it will be difficult for NE to escape the overall downward pull of what we see as deteriorating offshore drilling fundamentals,” commented analyst Mike Urban.

Diamond Offshore DO downgraded from Hold to Sell, price target cut from $60 to $34. Shares down one percent.Ensco International ESV downgraded from Hold to Sell, price target cut from $52 to $41. Shares down 1.7 percent.

Transocean RIG downgraded from Hold to Sell, price target cut from $45 to $27. Shares down 2.4 percent.

Price Target Changes

Atwood Oceanics ATW maintained at Hold, price target cut from $52 to $50.

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Ocean Rig ORIG maintained at Buy, price target cut from $24 to $21.

Rowan Companies RDC maintained at Hold, price target cut from $34 to $33.

Seadrill Limited SDRL maintained at Hold, price target cut from $40 to $36. Shares down 0.9 percent.

Unchanged

Hercules Offshore HERO maintained at Buy with $6 price target.

Pacific Drilling PACD maintained at Buy with $14 price target.

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsDeutsche BankMike Urban
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