Deutsche Bank: Hope Is Not Lost For Offshore Drillers

In a new report, Deutsche Bank analyst Mike Urban explained why offshore drilling investors have reason for optimism. Despite talking share prices and a weak near-term demand outlook, Urban believes that offshore drillers remain a secular long-term growth story.

Patience Required

According to Urban, the consensus view that deep-water drilling is structurally flawed is misguided. Unfortunately for investors, the turnaround will not be happening any time soon. Deutsche Bank is projecting long-term (10-year) demand for 320 floating rigs versus only 225 currently active rigs.

However, demand weakness likely means that deep-water rig count has not yet bottomed. Urban projected that it could hit as low as 194 by the second half of 2016.

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Restructuring Required

Deutsche Bank is calling for as many as 70 floaters and 110 additional jackups to exit the current fleet by early 2017. “With the oil price testing new lows again recently, backlog dwindling and hopes for a near-term demand recovery fading rapidly, the industry now seems more realistic about the need to take more decisive action on capacity reduction,” Urban explained.

Decisive Action

Urban called for aggressive action from industry leaders such as Transocean LTD RIG. Now that Transocean has a new management team in place, Urban believes that the company is in position to take radical restructuring measures that could include re-capitalizing the balance sheet and scrapping up to 40 rigs.

Given recent share price weakness and the firm’s long-term bullish outlook, Deutsche Bank has upgraded the stocks of Transocean and Diamond Offshore Drilling Inc DO from Sell to Hold.

The firm currently has Buy ratings on Ocean Rig UDW Inc ORIG and Pacific Drilling SA PACD.