3 Stocks To Focus On Path To Offshore Drilling Recovery

Increases in new project opportunities are expected to reverse four years of decline in offshore drilling contractor revenues, a new report from the independent energy research and business intelligence company Rystad Energy shows. With the energy sector emerging from the crude slump and debt-driven overhaul, renewed interest in the offshore drilling space is finally raising hopes for the industry’s recovery.

Oil Price Collapse Hurt Offshore Industry

If there's one thing the commodity price crash has taught oil and gas companies, it's capital discipline. The 2014-16 collapse in oil prices, which saw crude fall to a 13-year low of around $26 per barrel, forced energy executives to consider a new approach to capital deployment.

When oil was in the triple-digit territories of 2014, companies had billions of dollars in exploration budgets. The aggressive approach was essentially tied to commodity prices and severely dented balance sheets when prices hit rock-bottom in 2016. With operating profitability compromised, the worst oil crash in over half a century triggered major restructuring and a change in the companies’ long-term focus. Most producers concentrated on becoming leaner by shunning large, capital-intensive projects.

In particular, the price slump forced the top energy companies to cut spending on the costly offshore drilling projects due to lower profit margins. This, in turn, meant less work for the beleaguered drillers. With old contracts rolling off, the companies either got rigs stacked or bore high reactivation costs and accepted much-reduced day rates. As a result, overall revenues were impacted.

Promising Outlook for 2019

Steadiness of oil prices at the current levels is driving operators to make longer-term plans, as deepwater projects become cost-effective. This could increase demand for offshore drilling services. Sector consolidation, adoption of superior technologies, new operational systems’ optimization of the fleet by strategic sell-offs and acquisition, seeking profitable collaborations, among other strategic strides, will certainly help boost future prospects of the drilling companies. While one does not expect the sunny days of the drilling industry to return immediately, signs of recovery can definitely be seen.

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