Wells Fargo Downgrades Seadrill, Upgrades Others In Offshore Space

Wells Fargo on Monday issued an industry report highlighting several offshore drillers, as annual offshore spending reductions are necessary to combat the rising supply of oil.

Analysts Judson Bailey and Coleman Sullivan wrote, "After several years of cost escalation followed by a 50+ percent decline in oil prices over the second half of 2014, we estimate that two painful years of 10-15 percent annual offshore spending reductions are needed to "right size" offshore budgets within a $65-75 oil price environment. Helping to drive these reductions, in our view, will not only be a significant decline in offshore activity levels, but also 20-40 percent reductions in offshore service and engineering costs over the next 1-2 years.

"We believe the mounting oversupply of rigs and OSVs creates more downside risk for the offshore drillers and OSV companies as day-rates drop to break-even levels. Conversely, we believe that the risk/reward profile for subsea-levered capital equipment names like CAM and FTI is beginning to look more attractive as the deep-water cost curve comes down and international and national oil companies (IOCs and NOCs) begin to execute name plate projects again by late-2016 and 2017."

Based on their analysis, the analysts downgraded Seadrill Ltd (NYSE: SDRL) from Market Perform to Underperform. The analysts also upgraded FMC Technologies, Inc. (NYSE: FTI) and Cameron International Corporation (NYSE: CAM) from Market Perform to Outperform. Overall, Wells Fargo cut their EPS estimates for offshore drillers and lowered their offshore rig forecast and dayrate assumptions.