Are The Survivors Of The Offshore Bust A Buy?

I know that many of the oil analysts out there have gone weak on me. Unable to believe in the inevitable re-balancing of the oil market, they continue to see long, flat markets in oil prices coming for the next year, perhaps two. Even OPEC and the IEA, in need to put out conservative projections, are only looking for $60 oil at best by the end of 2017.

You know, I think they're all wrong. There's nothing that has proven to be more wrong than counting on an absolute ceiling - or floor - in oil prices in the last decade.

Meanwhile, the wait for what I think is inevitable re-balancing and a real supply shortage from decimated capex over the last three years can be difficult, if not devastating, in the current market of slowing disintegrating oil prices and even weaker oil stocks.

That's why our discipline of concentrating on independent U.S. oil producers with good balance sheets has seemed correct and prudent. And yet, there are other sub-sectors to consider, even if only for a speculative play. Recently, my interest in Transocean (RIG) was piqued with their sale of their complete jack-up rig fleet for $1.35b.

The entire sub-sector of offshore drilling has not been a happy one and mostly one to avoid. Inventory of rigs for offshore work has greatly overrun demand for many years to come and continues to need cutting. The impetus for offshore assets to be developed has dulled in light of onshore shale assets and the relatively flexible and short commitments needed to bring those to market. In comparison, offshore assets require very long-term commitments of capital and crews.

So in the family of offshore players, including Transocean (RIG), Noble Corp. (NE), Seadrill (SDRL), Diamond Offshore (DO) and Ensco (ESV), I've thought that at least one of these, if not two, would ultimately need a restructuring or outright bankruptcy to again make the sub-sector investable. And those that were likely to remain would be those that had somehow managed to, both scale down, and update their fleets during this period of weakened cash flows and strained debt positions. A very tough charter, to say the least.

Now, Transocean has, in many ways, been one of the worst of the offshore players, despite being one of the largest - their fleet is the oldest and their moves to update their rigs has been an ongoing battle for the last four years. Debt has been a constant problem too, with continuing service of some of the most expensive high-yield issues hanging over their heads. Still, their expertise in ultra-deepwater drilling is unsurpassed, and that unique ability is what Transocean and her investors are counting on, as oil prices improve.

Looking at Transocean today, however, it's not a pretty picture: Of their 30 ultra-deepwater rigs, 19 remain either stacked or idled.

Yet, the sale of their complete shallower rig fleet of 15 jack-ups, including 5 that are yet to be completed, indicates that they are making the very tough choices going forward - concentrating on becoming specialists with their deepwater expertise going forward. The also surprisingly successful auction for leases in the Gulf of Mexico also adds some fuel to the belief that perhaps the deepwater survivors of this offshore bust will ultimately do very well indeed.

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The chart isn't wonderful, but there is at least one good sign here. Despite the general downtrend, the stock has been carrying since it's mini-breakout in November last year, their 50-day moving average, which once was strong resistance now looks like it could be a support line for the stock's next trend - upwards.

In playing a very tough waiting game for oil to re-balance and finding stocks to invest in for a long-haul, offshore has been one of my least favorite sub-sectors to play. But it must be admitted that finding the right offshore player could be one of the better opportunities once oil begins to trend solidly higher - and Transocean could be that player.