Jefferies Comments On The Offshore Drilling Recovery (RIG)

Although Jefferies is positive on the recovery in offshore drilling activity in 2011 and 2012, it remains Neutral on RIG shares as it believes idle capacity, newbuild supply growth, and a lack of EPS upside provide headwinds for the industry. Jefferies also believes that Consensus EPS expectations remains too high. Jefferies highlights Transocean's RIG fleet status report that was released last night. Overall, it believes the fleet report is a modest positive as three of RIG's UDW rigs receiving stand-by rates have returned to full dayrate and three others are no longer under force majeure. The biggest highlight from the FSR is that three UDW rigs - the DDI, the C.R. Luigs, and the Discoverer Spirit - have returned to full dayrate working on water injection wells and a sidetrack. Although these three rigs returning to full rate is positive relative to its model, Jefferies would note that they could go back on standby later this quarter or in 2Q unless the operator is able to obtain another permit. Jefferies has a Hold rating on RIG and an $81 PT RIG closed Thursday at $77.32