Energy

Jefferies Lowers Expectations on Diamond Offshore, Ensco, Noble, Rowan, Transocean

Jon C. Ogg

Published: July 18, 2017 11:56 am

Last Updated: January 12, 2020 10:02 am

Many investors and analysts alike have been fighting over what is a good entry point for long-term energy investors. Even the top stocks are down from their 52-week highs, but many of these primary and secondary companies in the oil and gas services and equipment have seen their shares go back down to multi-year lows.

Jefferies has decided to take a mixed view on its oil services and equipment stocks, and in offshore drilling the firm believes the industry is suffering from too many short-term jobs without enough stacking. The firm maintained its Buy and Hold ratings on the companies followed in this segment, but the one common theme is lower price targets and lower earnings expectations.

Despite outpacing expectations so far in 2017, Jefferies thinks well-drilling activity will fall in the second half of 2017. Still, the firm did note that contracting is unlikely to grind to a halt and Jefferies sees some high-profile jobs moving along. Eduardo Royes and Brad Handler of Jefferies said in their report:

The big overhang remains a path to pricing power. Supply reductions—both in the aggregate and as it relates to the marketed fleet—have materially abated as we think contractors hold out hope for a strong recovery late this decade. Noble remains our favorite driller and Ensco is our preferred “Hold”.

As you will see below, even the “Hold” ratings now have upside to the lower price targets. Trading data has been added for the daily price reactions and to the 52-week trading range, and the consensus analyst price targets are from Thomson Reuters.

Diamond Offshore Drilling, Inc. (NYSE: DO) was maintained as Hold but the price target was lowered to $12 from $14. Diamond Offshore Drilling was last seen trading down 0.5% at $11.37, versus a 52-week range of $10.06 to $25.16 and versus a consensus analyst target price of $14.04.

Ensco plc (NYSE: ESV) was maintained as Hold but the price target was lowered to $6 from $9. Ensco was last seen trading up 1 cent at $5.25 versus a 52-week range of $4.71 to $12.04. Ensco has a consensus analyst target price of $7.77.

Noble Corporation plc (NYSE: NE) was maintained as Buy at Jefferies, but the price target was lowered to $5.50 from $7. Noble was last seen trading down 1.65% at $3.88. Noble has a 52-week range of $3.32 to $8.43 and it has a consensus analyst target price of $5.06.

Rowan Companies plc (NYSE: RDC) was maintained as Hold, but the price target was lowered to $12 from $15. Rowan shares were last seen trading down 0.3% at $10.95, versus a 52-week range of $9.74 to $21.68 and versus a consensus analyst target price of $14.86.

Transocean Ltd. (NYSE: RIG) was maintained with a Hold rating and the price target was lowered to $9.50 from $11.50. Transocean shares were last seen trading down 1% at $8.27. Transocean also has a 52-week range of $7.67 to $16.66 and it has a consensus analyst target price of $11.27.

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Before investors panic that yet another analyst team is cutting their Buy and Hold price targets after such a deep fall from recent highs, the Jefferies team continues to believe that a bottom is in sight despite noting that a trough so far seems doubtful. The team also noted that a dip in second half activity could be better for the long term. The Jefferies report said:

Whether or not activity troughs much lower than current levels or not, the building blocks for a stabilizing deepwater landscape seem to be forming, at least qualitatively… The marketed floater fleet today stands at 206 versus 208 at the end of the first quarter and 218 at the end of 2016, suggesting that contractors, upon sensing a troughing in activity, stopped stacking rigs.

West Texas Intermediate Crude was last seen rising 35 cents t0 $46.58 and Brent Crude was last seen trading at $48.65.