Why You Shouldn’t Fear the Current Storm in the Deepwater Drilling Sector

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It has been a rough year for deepwater drillers like Seadrill, Transocean and Ensco. However, the industry’s current storm won’t last forever.

Transcript of Why You Shouldn’t Fear the Current Storm in the Deepwater Drilling Sector

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Why You Shouldnt Fear the Current Storm in the Deepwater Drilling Sector

Photo credit: SeadrillIn our view, the energy needs of the 21st century will be satisfied by a combination of growing production fromdeepwater frontiers, which had gone from effectively zero to about 9% of worldwide oil production in 20 years. Clay Williams CEO of National Oilwell Varcohttp://seekingalpha.com/article/2170163-national-oilwell-varcos-q1-2014-results-earnings-call-transcript2According to industry estimates, offshore deepwater production will reach 14-16 million barrels of oil per day by 2030 or more than 15% of daily oil supply. Source: Bloomberg bits3The reason for the growth is simple, thats where the industry is finding the oil...

Source: Transocean Investor Presentationhttp://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTQ3MTcyfENoaWxkSUQ9MjM4OTIzfFR5cGU9MQ==&t=14and its relatively inexpensive to produce.

Source: Seadrill Investor Presentationhttp://www.seadrill.com/ShowFile.ashx?FileInstanceId=0ff5a331-9092-4faa-8945-705119a83b355Yet, despite the strong long-term outlook, the short term outlook is weaker. This has impacted the share price of contract drillers.

http://www.seadrill.com/ShowFile.ashx?FileInstanceId=0ff5a331-9092-4faa-8945-705119a83b356One of the reasons for this weakness is due to the building boom undertaken by contract drillers.

http://www.seadrill.com/ShowFile.ashx?FileInstanceId=0ff5a331-9092-4faa-8945-705119a83b35 and http://www.enscoplc.com/files/presentations/2014/06182014%20June%20Investor%20Presentation_v001_i30ls9.pdf7Thats a lot of new rigs. For perspective, the rigs under construction by the top three builders combined Seadrill (20), Transocean (14) and Ensco (8) are adding what amounts to be another Diamond Offshore or Rowan to the industry.http://www.seadrill.com/ShowFile.ashx?FileInstanceId=0ff5a331-9092-4faa-8945-705119a83b35 and http://www.enscoplc.com/files/presentations/2014/06182014%20June%20Investor%20Presentation_v001_i30ls9.pdf8While thats a lot of supply in the near-term, longer term the market looks undersupplied with rigs.

http://www.seadrill.com/ShowFile.ashx?FileInstanceId=0ff5a331-9092-4faa-8945-705119a83b35 and http://www.enscoplc.com/files/presentations/2014/06182014%20June%20Investor%20Presentation_v001_i30ls9.pdf9

http://www.seadrill.com/ShowFile.ashx?FileInstanceId=0ff5a331-9092-4faa-8945-705119a83b35 and http://www.enscoplc.com/files/presentations/2014/06182014%20June%20Investor%20Presentation_v001_i30ls9.pdf10Investor takeawayAdd it all up and the long-term fundamentals of the deepwater drilling market look robust.

Investor takeawayThis is why investors shouldnt fear the current storm, but embrace it as a buying opportunity that might not last much longer.


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