Energy Business

Analyst Calls Offshore Drillers a Buy After the Sell-Off

It is one thing to be a sector caught up in an overall market sell-off. It is quite another when the fundamentals are reasonably good and the sector has been sold off already. Given the significant downturn for the offshore drilling space and the rash of downgrades for the group, the energy services analysts at Wunderlich thought it was worth looking at this turn of events in a historical context, particularly as this downturn has not had the same “feel” as those in the past.

Most downturns, the downturn in 2010 after the Macondo well control incident and horrible Gulf oil spill notwithstanding, are largely driven by commodity price weakness. Weakness that translates into weaker demand or at least the perception of weaker demand. However, this downturn has seen the price of Brent crude remain relatively stable, and yet shares for the offshore drillers and offshore support vessels have declined about 18% on average since November.

Going back to 2008, the last three significant pullbacks, those of at least 30%, for offshore oilfield service equities have averaged declines of about 47%. The three downturns all could be directly related to events that could be classified as Black Swans (the financial crisis in 2008, the Macondo blowout and the European debt crisis), with all but the Macondo incident also seeing a pullback in Brent crude. With none of those Black Swan type scenarios in play now, the Wunderlich team feels that maybe the sell-off is way overdone and there are names to buy now.

Here are the top stocks to buy for investors looking to take a long-term view for the offshore drilling sector. Wunderlich favors offshore oilfield services long term, but in the near term they are negative on the offshore support vessel providers.

Hercules Offshore Inc. (NASDAQ: HERO) is a top small cap name to buy for 2014 at Wunderlich, and it made our list of top stocks to buy trading $5. The company provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry worldwide. Hercules Offshore operates through five segments: Domestic Offshore, International Offshore, Inland, Domestic Liftboats and International Liftboats. While its recent fleet status report was a little unsettling to some Wall Street firms, the lower price entry point may be attractive. The Wunderlich Price target is $10, and the Thomson/First Call consensus number is $8.4. Shares closed Tuesday at $4.94.

Noble Corp. (NYSE: NE) is a deepwater driller that many Wall Street analysts are very bullish on. With corporate missteps behind the company, its shift to the deepwater/floater market will benefit from an improving landscape and very strong demand. Investors receive a respectable 4.7% dividend. Wunderlich has a $38 price objective for the stock, while consensus is slightly higher at $39.16. Noble closed Tuesday’s trading at $31.11.

Ocean Rig UDW Inc. (NASDAQ: ORIG) is another outstanding name that has been hammered. The company has five units set for delivery through 2015, which will nearly double the company’s current fleet. Unfortunately, only three of these five units is on a contract for longer than one year, and one unit is yet to find a contractor. If prices stay stable, they should lock it in. The Wunderlich price target is $25, and the consensus figure is $22.30. The stock closed Tuesday a $16.93.

Pacific Drilling S.A. (NYSE: PACD) announced last month that its newest drillship, the Pacific Khamsin, has begun operating off the coast of Nigeria. The most noticeable impact on the company’s earnings that will come from this rig beginning operations will come in the first quarter of 2014. This is because the rig earns revenue (and thus profit) for the company every day that it operates, and the first quarter of 2014 will be the first quarter that the rig spends every day (or nearly every day) in operation. Wunderlich has a $16 price target, and the consensus is at $13.34. The stock closed Tuesday at $9.93. A move to the target price would represent almost a 60% gain for shareholders.

Rowan Companies PLC (NYSE: RDC) is a major provider of global offshore contract drilling services, focused on safely and efficiently fulfilling the demanding offshore drilling needs of its customers. Rowan claims that it maintains a 90-year commitment to the safety and development of employees and has cultivated one of the most experienced, skilled and dedicated workforces in its industry. Rowan holds a leading position in high-specification jackup rigs, and its fleet of 30 jackup rigs operates worldwide, including the Middle East, the North Sea, the Mediterranean, Trinidad, Southeast Asia and the Gulf of Mexico. The Wunderlich target for the stock is $46, and the consensus target is $39.82. Rowan closed Tuesday at $31.65.

SeaDrill Ltd. (NYSE: SDRL) has declined by nearly 26% from its all-time high of $48, and it may offer investors a solid total return play. The company is flat-out cheap, trading at just eight times trailing earnings. The company sees a global rig supply and demand imbalance over the next six years or so. The biggest part of the uncertainty and where most participants differ is on the level of rig retirements. In fact, SeaDrill sees such a massive imbalance that it expects a 189-rig shortage based on 2020 demand. The company sees the 60 new builds over the next three years, only slightly exceeding the 50 rig retirements. Investors are paid a gigantic 10.6% dividend. The Wunderlich price target is $51, and the consensus is at $46.32. The stock closed Tuesday at $36.17.

Tidewater Inc. (NYSE: TDW) is the only offshore services name that Wunderlich rates a stock to buy. Tidewater provides offshore service vessels and marine support services through the operation of a fleet of marine service vessels. It provides services in support of offshore exploration, field development and production, including towing of and anchor handling for mobile offshore drilling units; transporting supplies and personnel necessary to sustain drilling, workover and production activities; offshore construction, ROV operations and seismic support; and various specialized services, such as pipe and cable laying. Investors are paid a 1.9% dividend. The Wunderlich price target is $76, and the consensus target is $68.93. The stock closed Tuesday at $50.49.

The bottom line for investors is that the sector was hammered long before the current correction started. This provides a stellar entry point to some of these top names to buy. Even a small addition to a portfolio may prove to be a top alpha play for the rest of the year, especially if oil pricing stays relatively firm.

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