Offshore oil driller stocks such as Transocean (RIG), Noble (NE), GlobalSantaFe (GSF), Diamond Offshore Drilling (DO) and ENSCO (ESV) have been left in the wake of an otherwise booming stock market -- shares trade at 6-7 times 2008e earnings -- on concerns the cyclical industry may be at or near its top.
Investors fear a drop in oil and gas prices could send day rates for rigs, which are typically leased for three-year stints, diving. But Transocean CEO Bob Long says deepwater rigs, which currently lease for about $425,000/day in the Gulf of Mexico, would continue to be in demand even if oil were to fall to the $35-40/barrel range.
There are also takeover rumblings in the sector due to the drillers' strong balance sheets -- GlobalSantaFe and Noble have been mentioned as potential targets. And Ole Slorer, a Morgan Stanley analyst, says drillers could boost share prices 50% by initiating earnings-linked dividend policies instead of the share buybacks they currently favor.
He says his thesis has met with extreme hostility from drillers, but counters that share-buybacks have failed to boost stock prices, while dividends would both give the companies more cash (through rising share prices) and give investors the choice to make their own share buybacks through reinvestment. Regardless, strong fundamentals, potential takeover activity and P/E ratios among the lowest anywhere could lift drillers' shares sharply.
Investors fear a drop in oil and gas prices could send day rates for rigs, which are typically leased for three-year stints, diving. But Transocean CEO Bob Long says deepwater rigs, which currently lease for about $425,000/day in the Gulf of Mexico, would continue to be in demand even if oil were to fall to the $35-40/barrel range.
There are also takeover rumblings in the sector due to the drillers' strong balance sheets -- GlobalSantaFe and Noble have been mentioned as potential targets. And Ole Slorer, a Morgan Stanley analyst, says drillers could boost share prices 50% by initiating earnings-linked dividend policies instead of the share buybacks they currently favor.
He says his thesis has met with extreme hostility from drillers, but counters that share-buybacks have failed to boost stock prices, while dividends would both give the companies more cash (through rising share prices) and give investors the choice to make their own share buybacks through reinvestment. Regardless, strong fundamentals, potential takeover activity and P/E ratios among the lowest anywhere could lift drillers' shares sharply.
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