Credit Suisse Notes Top Picks and Misses for Offshore Drillers

In a report published Friday, Credit Suisse analyst Gregory Lewis reviewed the “Beaten, Battered and Bruised” offshore drillers. Lewis noted that offshore drillers are underperforming the OSX in 2014 by approximately 3% year-to-date, after a disappointing 2013, where the sector underperformed by approximately 15%. Credit Suisse downgraded Atwood Oceanics, Inc. ATW from Outperform to Neutral due to a limited upside compares with other drillers in the sector. Lewis sees the most value on Noble Corp. NE and Rowan Companies plc. RDC which have an approximate 20% and 40% upside, respectively. Both companies are “cheap” on Credit Suisse's NAV and DCF analysis, especially compared with SeaDrill Limited SDRL and Atwood Oceanics. SeaDrill and Atwood “are playing a different game - paying out all of their cash flow as a dividend and shifting assets to SDLP (financial arbitrage).” The analyst commented, “We expect lower gen floater dayrates to continue to sink in 2014, with new/next gen dayrates flattish. Bottom line – lower dayrates and slowing offshore CAPEX has put the drillers in the penalty box. Under this backdrop stock selection matters and we like NE (De-Risked NAV $32) and RDC (premium fleet trading at a discount).”