Recovery Is 'A Long Way Off' For Oil Drillers, Bank Of America Says

Bank of America raised its price target on Diamond Offshore Drilling Inc DO Monday from $29 to $31 and maintained an Underperform rating.

Analysts, led by Douglas L. Becker, noted that counter-cyclical acquisition opportunities may be on the horizon following the suspension of the company’s special dividend, which saves approximately $400 million per year.

Becker expected that oil service stocks will see a trough in the first half of 2015 as the U.S. slows oil production growth. The analysts, however, painted a discouraging picture of the offshore drilling market.

Offshore drillers are expected to underperform due to structural over-supply with a recovery “a long way off.”

A 20 percent YoY contraction in the offshore drilling market is anticipated with little chance of new fixtures to be announced in 2015.

Related Link: Credit Suisse Just Downgraded Transocean, And Shares Are Falling

The analyst report also expected a “significant number” of idle rigs in 2015, including recently delivered sixth generation drillships, which incur a minimum cost of $100,000 per day. Additionally, many ultra-deepwater rigs are expected to be without a contract and idled by the end of 2015.

Looking beyond the difficulties of 2015, Becker noted that it is prudent for Diamond Offshore to “retain cash for opportunities that may materialize in a distressed market.” Acquisitions of both individual rigs or whole companies may be possible.

The $400 million savings from the dividend suspension and opportunities for acquisitions ahead may be why, as Becker observed, that Diamond Offshore has recently outperformed the Oil Service Sector (NASDAQ: OSX).

Diamond Offshore Drilling Inc recently traded at $34.10, down 0.87 percent.

Also worth watching: The adverse market conditions could impact Transocean LTD RIG and Seadrill Ltd SDRL, both of which have fallen over 4 percent on Tuesday.