The Sedco 714 oil platform, operated by Transocean Ltd., stands in the Port of Cromarty Firth in Cromarty, U.K.

Matthew Lloyd | Bloomberg | Getty Images

The Sedco 714 oil platform, operated by Transocean Ltd., stands in the Port of Cromarty Firth in Cromarty, U.K.

Shares of offshore drilling and services companies surged on Monday after UBS upgraded several stocks in the space and as oil prices hit multi-month highs.

Transocean‘s stock jumped 7 percent to nearly $10. Shares of Diamond Offshore were up about 6.5 percent, above $14 share. Noble Corporation rose 10.8 percent to trade above $4.50. Ensco International cracked $5.50 per share, up 6.9 percent. Rowan Companies tacked on 3.4 percent to trade at nearly $12.

UBS raised its price targets for offshore drilling equipment providers, pointing to signs of improving demand for oil rigs and stabilization in the sector. The bank’s view that oil prices will normalize in 2020 and 2021, as well as measures taken to push out debt payments, bolsters the case for the companies, analysts said in a research note released on Monday.

“We conservatively assumed oil prices in the high-$50’s to low-$60’s by 2020 (below UBS estimate of $67/bbl WTI). However, if oil prices retrench to below $50/bbl and remain at those levels into 2020 financial risk exists given levered balance sheets,” UBS said.

On Monday, Brent crude prices rose above $58 to the highest level in more than two years, while U.S. crude topped $51 a barrel for the first time in four months.

UBS sees utilization for drill ships and jack-up rigs improving slightly next year, followed by greater demand growth in 2019 and 2020. Three years of weak oil prices have weighed on demand for offshore drilling services.

Steady utilization rates and growing rig demand for existing wells are offsetting the expiration of long-term contracts, the bank said.

“However, for the sector to truly tighten exploration (or greenfield) drilling would need to return which would only begin to occur with oil prices in the high-$50 to low-$60s,” the analysts wrote.

UBS raised its forecasts for 2018 earnings before certain expenses in the space by about 25 percent. While the new stock price targets are still below recent 52-week highs, UBS analysts said they believe there is 15 percent to 60 percent upside to those targets.

Shares of offshore drillers were down about 80 percent from highs reached in 2013 and 2014, but have risen about 25 percent from those lows in the last month, UBS noted.

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