News of 50 or more Asia FIDs (final investment decisions) representing $28 billion to develop billions of barrels of oil reserves over the next three years may be a sign that the multiyear offshore energy nightmare may be near an end.
In anticipation of this development, stock prices of offshore contract drilling companies have jumped. If you look back at the trading history for the past year of Transocean, Ensco and Diamond Offshore it shows that all three stocks reached their lows within days of crude oil prices hitting bottom. Since those lows — in both oil and share prices — the trend has been steadily upward. Prices have seen some volatility, but that is natural in markets subject to both long-term forces and short-term news.
While oil prices have risen about 50% since their bottom, stocks in drillers have increased 50% and some have doubled. The stock market is a discounting mechanism — assessing and valuing future prospects for a company’s earnings, cash flows and dividends. If the market believes that the underlying factors driving a company’s financial results are improving faster anticipated, the share price will rise. Likewise, when the market feels that management’s optimism about the future is ill founded, it will beat down the share price.
Helping set the tone of an improving offshore market, prior to the Asia FIDs announcements, were favorable comments from the heads of the three largest oilfield service companies. While the CEOs were positive about significant increases in North American activity, largely due to continued growth in shale drilling and production, comments about the state of the recovery internationally were equally positive. “In the international market, we expect growth in all regions in 2018 for the first time since 2014,” was a critical observation made by Paal Kibsgaard, CEO of Schlumberger, during the company’s recent earnings call.
In contrast to the nimble North American oilfield market, the international business is like an ocean liner. It needs a lot of time to turn around and get going. Now that this sector is turning up, it will be a long time before it likely turns down again. That doesn’t mean international markets will experience a boom anytime soon, but companies will welcome steady improvement after over three years of struggling.
The fact that the oil industry is considering 50 FIDs in Asia, a region where offshore activity has been low for years, suggests that market dynamics have turned favorable for developing more local oil and gas supply. The offshore business will be a beneficiary of this. More importantly, a recovery in the depressed Asia region should help speed the recovery for the entire offshore industry.
A pickup in stock activity of contract drillers signals that investors believe that better days for the offshore industry lie ahead.