Despite some recent hiccups in the world, oil prices aren’t exactly surging through the roof. Low oil prices have been particularly painful for energy stocks that provide specialized equipment to the E&P industry. The problem is that energy producers need a certain price for the oil they extract in order to justify the heavy expenses needed to tackle certain kinds of wells.
And right now, the deepest offshore wells just aren’t cutting the mustard for E&P firms.
The underperformance of offshore wells has hurt the bottom lines and profits at the deepwater and offshore drilling stocks. Share prices have fallen hard over the last few months, and now analyst downgrades have begun pouring into the sector, causing even more pain for these energy stocks.
But as they say, “be greedy when others are fearful.”
For investors, the deepwater drillers over one of the best bargains in the high-yielding energy sector today.
A Energy Stocks Bargain In The Making
Unfortunately for deepwater drilling stocks, several short- and medium-term issues are having their way with the companies’ share prices. Over the last month, shares have plunged by an average of 10%. One of the biggest culprits of that downturn has been falling oil prices.
Despite the negativity, though, investors may want to be buying the drillers with both fists.
A lot of the negativity surrounding falling day rates may be misplaced. Not every sector in the offshore drilling world has seen falling prices or demand. Advanced jack-up styled drilling rigs and rigs that can handle harsh environments — such as the Arctic and North Sea — haven’t seen an deterioration in day rates nor utilization.
At the same time, day rates for the ultra-deepwater semisubmersible market have actually risen from the earlier part of this year, while utilization rates for ultra-deepwater drillships have not declined since hitting 100% back in late 2011. And despite the decline in day rates for these vessels, they are still well above previous records set back 2011 and have been holding steady since the end of last year.
So for the firms with the most advanced rigs, earnings have suffered a bit … but it’s no cause for the outright sector selloff. Today, the energy stocks in the drilling sector are selling for low metrics not seen in years. Dividends in the sector are hitting highs, and shares of deepwater drillers are now bargains.
The bargains are especially enticing when you consider the long-term story that E&P firms will need to continue prospecting offshore in order to fuel the world’s hunger for oil. And fallen day rates for rigs have actually lowered the breakeven cost of drilling offshore to the point where it’s compatible to fracking shale.
With all of that upside in mind, let’s take a look at three of the hottest deepwater energy stocks to buy.