In a recent report, Credit Suisse gave their updated outlook for battered offshore drilling stocks. Last year was a nightmare for offshore drillers, as collapsing crude oil prices suffocated demand for drilling. But will things get better for drillers in 2015?
Bleak Outlook
Analysts believe that Q4 earnings numbers in the space will be relatively unimportant compared to the companies’ updated guidance for 2015. A large portion of all the drillers’ 2014 revenue came from rigs that will be rolling off contract in 2015 and 2016. It’s unclear what (if anything) the drillers will be able to do to replace that revenue in this environment.
The issue is most pressing for Hercules Offshore, Inc. HERO 0.81% and Rowan Companies PLC RDC 4.14%, the drillers with the highest percentage of revenue rolling off contract in the first half of 2015.
Cash Is Critical
Analysts believe that drillers will be conserving cash in any way possible in 2015. The most obvious way to do so is by reducing/suspending dividend payments and share buyback programs. In other words, it’s unlikely that Transocean Ltd RIG 3.49% shareholders will see an 18 percent dividend yield in 2015.
Stocks Remain Heavily Shorted
Even though offshore drilling stocks are down about 50 percent in 2014, the companies remain heavily shorted. The heavy short interest may be a sign that traders believe the pain is not yet over for the drillers, even though the groundwork is now in place for major short covering should the oil market stabilize and/or recover sooner than expected.
Earnings Predictions
Credit Suisse predicts earnings beats for Ensco PLC ESV 2.22%, Seadrill Ltd SDRL 4.27% and Atwood Oceanics, Inc. ATW 3.81%. They below-consensus earnings coming for Hercules, Rowan, Transocean, Noble Corporation PLC NE 1.76%, Diamond Offshore Drilling Inc DO 2.6% and Pacific Drilling SA PACD 4.06%.
Read this article and all my other articles for free on Benzinga by clicking here
Want to learn more about the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
