Energy Prospectus

2010 has been a rough year for the offshore drilling stocks due to the fallout from the April Macondo accident in the Gulf of Mexico. While the broader markets (DJIA, SPX) and oil service indexes (OSX) are roughly flat year-to-date, the offshore drilling group is down, on average, over 15%. So, has this pull-back created a buying opportunity in offshore drilling stocks? In today's update, we tackle this question by analyzing the potential timing of a recovery in various segments of the offshore drilling sector. The bottom line is that the timing and magnitude of the offshore drilling recovery will be more asset-specific than any cyclical offshore driller upswing in the past few decades. While valuations are attractive for those with long-term horizons, we think this offshore recovery will generally take longer than many think. That means offshore drilling investors should focus on international-driven jackups, particularly higher-spec, for the short term and leave the floaters to those with much longer-term horizons.

The main reason for our near-term pessimism is that it appears the current offshore U.S. deepwater moratorium is likely to morph into an "Obamatorium" where the drilling moratorium is technically lifted but drilling does not rebound due to Obama administration-directed permitting delays. Additionally, ongoing deliveries of (pre-meltdown ordered) rig new-builds mean that offshore drilling capacity is likely to increase in an already oversupplied market. Our main conclusions and the offshore drilling winners and losers are as follows: 1) the Obamatorium will depress U.S. offshore activity greater and longer than many expect - (everyone including U.S. energy consumers lose); 2) much like the U.S. land rig market, there is an increasing bifurcation in the jackup arena, as operators continue to pay a premium for high spec rigs - [Rowan (RDC) wins]; 3) Shallow water/low-end jackups likely suffer for several years - [Seahawk Drilling (HAWK) and Hercules Offshore (HERO) lose]; 4) Ultra-deep floater rates should stabilize in the near term but not improve meaningfully until 2013 - [eventually Transocean (RIG), Pride (PDE), Ensco (ESV), and Noble (NE) win]; and 5) mid-depth floaters suffer for several years - [Diamond Offshore (DO) and Atwood Oceanics (ATW) lose].

Obama Administration putting us at further risk by putting more red tap and cost on GOM drilling. You cannot build enough windmills or solar panels to replace the lost GOM production this will cause.

In a social group I belong to a subset of us joust re the political issues of the day. The moratorium/obamatorium is about the best example that gives light to the claim that priority one is jobs, jobs, jobs. Of course, this is a NE Ohio - who could not care less. To so many Obama can do no wrong. Carbon is evil and wealth is stolen not created. It is an interesting window into the mindless left.

Bob

I was in Mississippi a few month ago (before the BP well was capped) talking to some field workers. They all thought the moritorium was ridiculous. Would the federal goverment ban all airline traffic after a crash? Would all of GM be shut down if one plant had a fire?

BP drilling engineers made some major mistakes. They should be fired and BP should be hammered. Punishing all of the other companies and the thousands that work for them is insane.

In 2009 the Gulf of Mexico accounted for over 50% of the world's non-OPEC oil production growth.

All this really does is give more power to OPEC. Without the GOM oil production growing the West is once again totally at the mercy of OPEC.

BTW have you noticed that the environmental disaster isn't as bad as they said it was going to be. If you go to the Gulf Coast today you will see very little effect from the spill. Oil is bio-degradable.