Drillers Smashed On Deutsche Bank Sector-Wide Downgrades

Drillers are selling off sharply following a bearish report from Deutsche Bank. The industry has gained some traction recently as investors collect dividends and wait for a turn around.

Deutsche Bank thinks this is a fault, focusing specifically on fleet recapitalization: “We strongly disagree and believe the market is mistaking a wholesale recapitalization of the offshore rig fleet for a more benign cyclical downturn.”

The research house sees 13 percent downside in the industry. The note discusses weakness in both floaters and jack-ups.

The floater market is under pressure, while demand growth is paused (but may resume) and supply continues to increase.

“It is difficult to stimulate additional demand through lower rates and many 4th/ 5th generation units are perfectly capable of drilling the wells targeted by newbuilds and will therefore continue to price down to capture a relatively static demand pool.” Most pressure will be put on older units.

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Deutsche Bank also thinks the jack-up market is in a tough position, despite popular opinion. Analyst Mike Urban wrote, “While demand is more elastic and continued high oil prices should continue to support strong levels of activity, supply growth begins to accelerate dramatically in the 2nd half of this year and continues through 2017.”

Rating Changes

Noble Corp (NYSE: NE) downgraded from Buy to Hold, price target cut from $50 to $28. Shares down 12.5 percent.

“While we do not think the market is giving the company full credit for its fleet transformation, it will be difficult for NE to escape the overall downward pull of what we see as deteriorating offshore drilling fundamentals,” commented analyst Mike Urban.

Diamond Offshore (NYSE: DO) downgraded from Hold to Sell, price target cut from $60 to $34. Shares down one percent.

Ensco International (NYSE: ESV) downgraded from Hold to Sell, price target cut from $52 to $41. Shares down 1.7 percent.

Transocean (NYSE: RIG) downgraded from Hold to Sell, price target cut from $45 to $27. Shares down 2.4 percent.

Price Target Changes

Atwood Oceanics (NYSE: ATW) maintained at Hold, price target cut from $52 to $50.

Ocean Rig (NASDAQ: ORIG) maintained at Buy, price target cut from $24 to $21.

Rowan Companies (NYSE: RDC) maintained at Hold, price target cut from $34 to $33.

Seadrill Limited (NYSE: SDRL) maintained at Hold, price target cut from $40 to $36. Shares down 0.9 percent.

Unchanged

Hercules Offshore (NASDAQ: HERO) maintained at Buy with $6 price target.

Pacific Drilling (NYSE: PACD) maintained at Buy with $14 price target.