Offshore Drillers Aren’t as Cheap as They Look, Barclays Says

The beatings that Seadrill (SDRL), Transocean (RIG), Diamond Offshore Drilling (DO), Atwood Oceanics (ATW) and Rowan (RDC) have taken this year has left them looking attractive to some value investors. Barclays, however, doesn’t think the stocks are as cheap as they look.

Reuters

Shares of Transocean have dropped 16% this year, while Seadrill and Rowan has declined 15% and Diamond Offshore and Atwood Oceanics have fallen 13%, leaving them with valuations as low as 6.1 times 2015 earnings forecasts for Atwood Oceanics to 9.8 times for Diamond Offshore.

Barclays’ James West and Zachary Sadow explain why the drillers aren’t as enticing as they might appear.

Despite a series of negative data-points recently for the offshore drillers, including lower-than-expected dayrates for floating rig fixtures, further signs that the jackup market is slowing, and the inability of uncontracted newbuilds to find long-term commitments, interest is beginning to be piqued by value investors. While we continue to remain constructive on the long-term outlook for the drillers, we believe the seemingly compelling valuations for the offshore driller srepresent a value trap as we see more near-term earnings risk. Based on current market dayrates for various asset classes, we estimate there is over 30% downside to our current EPS estimates on an adjusted fully-delivered basis.

The offshore drillers look relatively cheap on our forward-year P/E and EV/EBITDA estimates, at 7.6x and 6.2x (below the ten-year averages of 12.0x and 6.9x, respectively). However, based on various recent data points which include lower market dayrates, we think there is substantial scope for further downside earnings revisions to consensus numbers…we estimate that on an adjusted fully delivered basis, the group is trading at nearly 12.0x and 7.5x P/E and EV/EBITDA, respectively…

How does this analysis impact the valuation of individual stocks? West and Sadow estimate that Atwood’s 2015 earnings could come in 45% below estimates, which would give it a valuation of 11.1 times 2015 estimates, not 6.1 times. Diamond Offshore’s earnings, meanwhile, could come in 63% below, giving it a valuation of 26.2 times, not 9.8 times. If Transocean’s 2015 earnings come in 37% below forecasts, it would trade at 12.9 times, not 8.1, while Seadrill would trade at 9.1 times, not 7.9 times, if its earnings were to come in 14% lower. The least impacted: Rowan. West and Sadow see a theoretical downside of  just 2.3% lower than 2015 forecasts, which would leave Rowan’s valuation virtually unchanged at 7.2 times.

Shares of Transocean have dropped 1.7% to $41.49 at 11:14 a.m. today, while Seadrill has fallen 1.3% to $35.05, Rowan has declined 3.3% to $30.17, Diamond Offshore Drilling has slid 3.7% to $49.14 and Atwood Oceanics is off 3.2% at $46.26.