Offshore Drillers Fall as Morgan Stanley Cuts Rowan; Buy Seadrill for Yield?

A bad year for offshore drillers is likely to get worse–and Morgan Stanley says even market favorite Rowan (RDC) could get hit. It recommends yield plays, including Seadrill (SDRL).

Bloomberg

Heading into today, Rowan had dropped 8.2% so far this year, thanks to its greater exposure to so-called jackups–floating barges with legs that be moved from place to place to drill. Companies with exposure to the floater market have dropped far more. Transocean (RIG), for instance, fell 15% during the same period.

Morgan Stanley’s Ole Slorer and Jacob Ng explain why they cut Rowan to Underweight:

Jackup dayrates have held up vs. what has unfolded in the floater market. We nevertheless highlight a surge in jackup orders, driven largely by speculative drillers at Chinese shipyards The jackup orderbook now stands at a record 140 units, of which only ~20 have been contracted…[Rowan] remains most levered to the jackup market in the meanwhile…

We also remain concerned over execution risk. [Rowan] has seen negative earnings revisions over the years while the start of floater operations this year could represent another area of execution risk. The Street currently expects [Rowan's] earnings growth to outpace peers, but we see room for negative earnings revisions and highlight that our 2015/16 EBITDA estimates remain 10-15% below the Street

Slorer and Ng prefer Seadrill, Seadrill Partners (SDLP) and North Atlantic Drilling (NADL). They explain why:

We do not see an immediate inflection in group sentiment but see an opportunity in getting paid to wait for a market recovery. Our favorite yield plays include [Seadrill, Seadrill Partners, and North Atlantic Drilling.] Meanwhile, we would stick to premium asset exposure ([Atwood Oceanics (ATW), Ensco (ESV), Pacific Drilling (PACD]) over lower- end fleets ([Diamond Offshore Drilling (DO), Noble (NE), Transocean (RIG)]).

Shares of Rowan have dropped 3.5% to $31.34 at 2:16 p.m., while Seadrill has fallen 1.2% to $34.88, Seadrill Partners has declined 1.1% to $30.14, Transocean is off 0.7% at $1,.33 and Atwood Oceanics has fallen 3.5% to $47.85.