The brokerage expects Diamond Offshore Drilling Inc DO and Transocean LTD RIG to outperform through year-end 2016, but maintained Rowan Companies PLC RDC as its only Buy-rated stock.
Justification
"We see some marginal positives and perhaps don't worry as much about some issues (e.g., contractual T&Cs), but the sector remains catalyst light," analyst Eduardo Royes wrote in a note.
Although the North Sea midwater market appears to be gaining steam and Australia continues to provide visible demand, the analyst said impact to estimates through the medium-term remain immaterial.
In addition, Royes highlighted that the rise in "undisclosed" dayrate contracts suggests rates at or below cash breakeven for short-term jobs, due to contractors' attempts "to 'get in' with customers/in regions viewed as strategic longer-term."
Analysis On Issues Moving Forward
"We look for DO to maintain its relative outperformance YTD and for RIG's relative strength in the past ~3 months to hold as well—we actually see modest upside to EBITDA in 2017 versus the Street partly on lower opex ($1.7 billion vs. Consensus of ~ $1.82+)," Royes continued.
"We see value in RDC, but little by way of catalysts in the very near term," Royes added.
The analyst has a Hold rating on both Diamond Offshore and Transocean, with price targets of $22 and $10, respectively. For Rowan, the analyst has a Buy rating with a price target of $18.
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