The decline in oil prices has had a dramatic effect on many investors’ portfolios, but one sub-sector stands out as being particularly awful; offshore drilling. For those who have not regularly invested in the sector, the story here is an unpleasant one. Over the last few years, as relatively high oil prices spurred investment across the entire energy sector, offshore drilling expanded like everything else.
One area of offshore that saw a particularly large infusion of corporate cash was ultra-deep water (UDW) drilling. UDW companies like Ensco PLC (ESV), Seadrill (SDRL), Transocean (RIG), Diamond Offshore (DO), and Noble Corp (NE). all put substantial investments into bringing new offshore drilling rigs to market. (Note: Noble is a separate company from Noble Energy (NBL). The two have a common corporate legacy, but are separate entities today). As a result, by the middle of 2014, there was an emerging glut of UDW rigs and day rates on these rigs started to collapse.
The oil price collapse last fall exacerbated the supply issues in the industry. By December, many offshore drillers were talking about stacking existing rigs. Stacking involves storing rigs to reduce costs of operation. Stacking can be cold or warm, with each process having different costs and benefits but in both cases, the step is an extreme one for a company to take. The process of stacking is costly, not easy to reverse, and often leads to subsequent rig scrapping.
Stocks across the…