Those who have invested in oil stocks rejoiced this week as the Organization of the Petroleum Exporting Countries finalized its first crude oil production cut since 2008. The news sent WTI crude oil prices soaring more than 8.3% to above $49 per barrel. Predictably, oil stocks had a positive reaction as well. However, the OPEC deal may be too little too late for a handful of deepwater oil stocks.
The OPEC deal is a positive first step in normalizing the global oil market. Oil prices will certainly benefit from the cut in the long-run. However, just how much and how quickly oil prices will rise remains a mystery.
Deepwater drilling stocks spiked following the OPEC news. But, despite the headline excitement, deepwater oil stocks are still in deep trouble. Even after the OPEC news, crude oil prices couldn’t even immediately regain the $50-per-barrel-level.
According to Rystad Reports, deepwater and ultra-deepwater oil projects require crude oil prices of “$77 and $64 per barrel, respectively,” just to break even. Meanwhile, plenty of shale oil projects in the U.S. have break-even prices in the $40 to $50 per barrel range.
The U.S. Energy Information Administration is now calling for WTI crude prices to average only $50 per barrel in 2017.
There is plenty of uncertainty in the oil and gas market right now. With this in mind, here are three deepwater oil stocks that aren’t out of the woods just yet.
Traders that own the following three offshore oil stocks should consider any dramatic OPEC-driven market rally as a selling opportunity. Instead of owning these stocks, they should transition to higher-quality oil services stocks with exposure to the lower-cost U.S. shale market.
Deepwater Oil Stocks to Sell: Seadrill Ltd (SDRL)
Things have become pretty bad for Seadrill Ltd (NYSE:SDRL). News the company might be able to avoid bankruptcy has been enough to send the SDRL stock up roughly 45% in the past month.
Seadrill just reported a net earnings loss of $656 million in Q3. CEO Per Wullf tried to put a positive spin on the situation. Unfortunately, even his near-term optimism was limited.
“Most of the new work is for short-term contracts at or near cash flow breakeven levels, and 2017 is expected to remain challenging,” Wullf said.
At or near break-even isn’t exactly reason for SDRL stock owners to celebrate, especially with such a massive debt burden. Seadrill is currently trying to negotiate a debt restructuring. As it stands, SDRL has $2.3 billion in current liabilities, and it has a total of $9.6 billion in liabilities through 2020.
If the stock jumps on a debt-restructuring announcement, traders should take the opportunity to sell while they can.
Deepwater Oil Stocks to Sell: Transocean LTD (RIG)
Citi analyst Scott Gruber says that things won’t begin to improve for RIG until at least 2018.
Argus isn’t quite so optimistic about Transocean. The firm sees a “secular” shift away from deepwater drilling toward onshore shale oil. In addition, Argus says RIG has more exposure to offshore oil projects than many of its peers.
Even one of Transocean’s biggest supporters, activist investor Carl Icahn, recently threw in the towel on the battered stock.
RIG management has made a valiant cost-cutting effort throughout the downturn. Transocean doesn’t appear to be in any immediate risk of bankruptcy, despite a revenue decline of 45.5% in the last three years.
Unfortunately, RIG is simply in the wrong business with oil prices under $50 per barrel. The stock needs a significant boost in oil prices to begin to grow revenue once again.
Deepwater Oil Stocks to Sell: Diamond Offshore Drilling Inc (DO)
If the offshore oil decline continues, Diamond Offshore Drilling Inc (NYSE:DO) may face the largest fall from grace. DO has several key contracts in place through 2020 that are priced well above the current market price.
In addition, 76% of its projected 2018 income is concentrated in just three contracts. Cancellation of one or more of these contracts could pull the rug out from under Diamond Offshore stock sooner than expected.
Goldman Sachs added DO to its “Conviction Sell” list back in September. Analyst Waqar Syed noted that Goldman expects demand for jack-up rigs to recover before demand for floaters, which is bad news for Diamond Offshore. The company has relatively higher floater exposure that its peers. That means that DO shareholders could be waiting even longer than the rest of the deepwater oil investors for a recovery.
Goldman’s not alone. As of May, Diamond Offshore was the only stock in the entire S&P 500 with a consensus “Sell” rating on Wall Street. DO no longer holds that dubious distinction after it was booted from the S&P in September.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.