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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Deepwater Looks At Long And Difficult Recovery

As investors look to position themselves to take advantage of the new normal with oil prices, there is a lot of consternation about which sectors have the best and worst positioning. Unconventional players like Apache, Devon, Parsley, and other all have shown greater resilience than many expected at the onset of the Crisis. That area of the industry looks poised to do well if oil prices stay in the $50 region. Stock prices are recovering for these firms, and many are expecting earnings to follow suit over the next year.

In contrast, sentiment could hardly be more negative in the deep water drilling sector. Nearly every sell side analyst is at best tepid on the prospects in the deep water drilling sector. While many other sectors in the energy industry have recovered some of their stock’s slump, deep water drilling remains moribund. Against this backdrop, some contrarian investors see an opportunity. Yet the deep water sector only makes sense for those with ample patience.

The deep water sector has seen a drop that is unparalleled in the oil sector. Top tier players like Noble Energy, Transocean, and Ensco are all down 80%. Noble is trading at $6 a share down from ~$35 in late 2013. Ensco is at $7.50 down from $55, and Transocean is around $10 down from $50. Already offshore firms like Paragon, Vantage, and Hercules Offshore have all run into problems requiring restructuring or bankruptcy. Reports last fall suggested that larger firms like Transocean might…

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