In 2015, offshore drilling contractor Transocean Ltd.’s (RIG US) stock price rose and fell along with the price of crude. In 2016, RIG’s stock price failed to recover as crude prices rose 91% to a midyear high of $51.09, while RIG’s stock price increased only 18.6% over that same time period.
One of the reasons that RIG did not fully participate along with crude’s rally is due to competition from U.S. shale oil production. While rig counts dropped from 1,499 to 536 in 2015, they did not recover alongside the price of oil in 2016, dropping even further to 525 until finally rebounding slightly and hitting 609 in March. While oil rig activity remained fairly stagnant, shale oil drilling was booming, increasing by over 250,000 barrels per day in 2017 alone.
Part of the reason for this surge in shale oil production is that producers continued to cut costs and modernize their wells as the price of oil fell. Breakeven prices in the $70 per barrel range are a thing of the past with most shale regions like Permian Basin (in Texas and New Mexico) and La Salle County (in Texas) remaining profitable at $36/barrel. Fewer offshore wells have come online as the increased production in shale drilling took up most of the slack that came from OPEC’s and Russia’s drop in production since the Q3 of 2016.
RIG’s revenue and EPS forecasts continue to look dismal, with 2017 revenues projected to be $900 million less than in 2016 and EPS turning negative for the first time in over a decade.
RIG short sellers did not fare well in 2016, with RIG’s stock price rallying in the 4rd quarter as rig counts finally rose 9 months into crude’s price rally. RIG’s short interest averaged $1.05 billion in 2016 but lost $233.4 million of net of financing mark to market P/L, a -22.03% yearly return. 2017 looks to be a recouping year for short sellers with short interest at $1.11 billion, up $242 million, or 28%, for the year. Shorts were up $102.3 million, or +11.45%, for the year as RIG’s stock price further decoupled from the price of crude.
If the price of crude continues to stagnate or drop even further, rig counts should not increase appreciably and RIG’s ability to generate increased profits from its fleet should continue to decline. Unless RIG can sell underperforming assets that are standing idle and not generating any revenues, like its “jack-up fleet”, there is very little chance that their entire fleet swings into the black. By reducing overhead and minimizing future Capex spending, they can become a leaner company that will be able to eke out profits - even in a sub $50 crude environment.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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