Offshore Drillers Reviewed By Jefferies

"Offshore drillers have underperformed within OFS since the recent June OSX peak," said Jefferies, "given negligible near-term recovery prospects and material estimate risk in 2018+."

The brokerage expects Diamond Offshore Drilling Inc (NYSE: DO) and Transocean LTD (NYSE: RIG) to outperform through year-end 2016, but maintained Rowan Companies PLC (NYSE: RDC) as its only Buy-rated stock.

Justification

"We see some marginal positives and perhaps don't worry as much about some issues (e.g., contractual T&Cs), but the sector remains catalyst light," analyst Eduardo Royes wrote in a note.

Although the North Sea midwater market appears to be gaining steam and Australia continues to provide visible demand, the analyst said impact to estimates through the medium-term remain immaterial.

Related Link: Could Ocean Rig Be The First Of The Deepwater Dominoes To Fall?

In addition, Royes highlighted that the rise in "undisclosed" dayrate contracts suggests rates at or below cash breakeven for short-term jobs, due to contractors' attempts "to 'get in' with customers/in regions viewed as strategic longer-term."

Analysis On Issues Moving Forward

"We look for DO to maintain its relative outperformance YTD and for RIG's relative strength in the past ~3 months to hold as well—we actually see modest upside to EBITDA in 2017 versus the Street partly on lower opex ($1.7 billion vs. Consensus of ~ $1.82+)," Royes continued.

"We see value in RDC, but little by way of catalysts in the very near term," Royes added.

The analyst has a Hold rating on both Diamond Offshore and Transocean, with price targets of $22 and $10, respectively. For Rowan, the analyst has a Buy rating with a price target of $18.

Full ratings data available on Benzinga Pro.

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