Monthly Archives: May 2017

The offshore drilling sector has been completely obliterated. Many of the stocks in this sector are down more than 90% from their highs of many years ago. For years the news has been terrible, and investors, regardless of how cheap the stocks have gotten, would not touch the sector. The offshore drilling industry, at around 30% of total worldwide production, is vital to the global economy, therefore it absolutely must survive. This week we have the first green shoots appearing and I believe the sector will, over time, rebound strongly from here.

David W. Williams, Chairman, President and Chief Executive said: "We believe improving conditions in the offshore drilling industry are becoming clearer. Client tenders for both jackups and floating rigs are on the rise and include emerging regions, as well as previously active areas that have largely been dormant over the past two years. Also, contract awards, especially in the jackup sector, are occurring with greater frequency, and field development activity is up, relative to the recent past, as project cost rationalization efforts lead to better program economics. Finally, we believe long-term oil market fundamentals are supportive of stable to higher crude oil prices, which with time will support an increase in rig demand." From Q1 Press Release

" I'm very pleased with Noble's start to 2017 and encouraged by what continues to be clear evidence of recovery in the offshore industry, although it's still in its early stages." David Williams, Noble Corp CEO on Q1 conference call

There it is, the first mention of a recovery in offshore oil drilling coming from Noble Corp (NYSE:NE), one of the strongest and best companies in the sector. For a sector that has been all but left for dead, these are the green shoots, the first signs of optimism that the bottom is in, and the early stages of a recovery are appearing.

What is the "clear evidence" that Noble Corp is referring to? First of all, rig tenders and inquiries are increasing globally. Everywhere from Brazil to the Middle East and from the North Sea to Asia/Pacific. Each market is showing increased inquiries and rig tenders. Contractual backlog increased for Noble from $3.3 billion at year end to $3.5 billion today. This is a remarkable change of pace for the company and its investors who have come to expect nothing but bad news from the sector.

Noble Corp is not alone in making positive remarks. Diamond Offshore (NYSE:DO), earlier in the week, made similar comments on their conference call, saying that inquiries into rigs were increasing as well as saying that we are seeing the first signs of a trough in falling rig demand. This was especially refreshing news as Diamond Offshore is normally the company in the sector that expresses the least amount of optimism.

There are a handful of reasons why investors should understand that this sector provides a huge opportunity for profits. The first and most obvious would be simply to say that this sector, which also includes Transocean (NYSE:RIG), Atwood Oceanics (NYSE:ATW) and Rowan (NYSE: RDC), has been the most beaten down sector in the market for a while now. Believe it or not, as the S&P 500 hits all time highs, the stock prices of many of these offshore drillers have been hitting multi-decade lows. Noble Corp traded as high as $60 per share a decade ago and recently bottomed at $4.16 per share. Atwood Oceanics traded at $60 a decade ago and recently bottomed at $6.12 per share. Diamond Offshore traded at $140 per share a decade ago and recently bottomed at $13.06 per share.

Readers of this article may question why I use the term "bottomed" when I refer to recent price action of these companies. The answer is, I truly believe that this past week saw the capitulation bottom for this sector, and it's perfectly timed with the first green shoots appearing. The fact that management from multiple companies are all coming out saying inquiries and tenders are increasing and for Noble, the fact that contractual backlog increased this quarter, is huge. These companies have won new contract work lately, and Diamond Offshore had a favorable ruling in a Brazilian Court recently in a dispute with Petrbras (NYSE:PBR).

The price action in the stocks also showed signs of a bottom. For example, the trading volume in all of these companies was well above average. In a two minute period on Friday, Diamond Offshore traded over 250,000 shares, which represents 10% of its normal trading volume for a full day. Seasoned investors know that when we see huge price jumps on huge volume, triggered by positive news in a sector that has seen only bad news, there is a strong chance that a solid bottom is in.

Even with the jump yesterday, investors can still buy these stocks at fire sale prices, and the best part is, these companies, with the exception of Seadrill (NYSE:SDRL), are not even in danger of failing. Diamond Offshore reported a small profit this past week, and Noble, while they reported a loss mostly tied to the writedown of asset values, reported an enormous amount of free cash flow for the quarter. This free cash flow for Noble amounted to 10% of their current market value, and this was one quarter. The full year will not continue at this pace, but the fact is, these companies are generating a ton of cash relative to their market values at or near the bottom of the cycle.

What are they doing with this cash? Diamond, in typical fashion, is stockpiling cash in anticipation of being able to buy distressed assets at pennies on the dollar. Noble on the other hand, is rapidly repaying debt. These capital allocation strategies ensure these companies exit the downturn in better shape than today. Ultimately, this is what matters the most, as investors today are not buying these companies for today's profits. Rather, we are buying them for the significant profits that come in the future.

So what does the sector look like in the future? This is the final piece to the puzzle, and one of the hardest for investors to grasp because the oil cycle takes years to play out. Many don't know this, but the truth is, the offshore oil sector, which produces nearly one-third of oil worldwide, is critical to the global economy. If one only listens to surface level news and does not think beyond headlines, it would be easy to convince oneself that oil is down because of shale oil production and shale oil production is the future preferred means of oil production.

A couple of key facts need to be understood, the first of which is that shale is incapable of replacing offshore. This is hard for many people to grasp because the noise surrounding the growth in shale production is deafening, yet no one talks about the obvious reality that it is not sustainable. When shale fields are first drilled, the best locations are drilled first. Depletion rates are often in excess of 50% annually, which means in order to maintain production, more and more wells are needed. Drilling additional wells still costs the same, but with lower production from existing wells and lower production from newer wells (because the best locations were drilled already), the model, similar to a person attempting to run on a treadmill that is inclining, eventually becomes unsustainable as it requires ever increasing efforts to maintain the same pace.

Many investors may stop at this point and wonder why shale is so popular today if it is not sustainable. This is indeed a good question, and my opinion is that the oil giants of the world are so cash starved from trying desperately to maintain their dividend payments in the face of negative free cash flow that they simply do not have the cash flow required to invest in offshore production. With shale, the payout comes much quicker than with deepwater production. Oil majors are aware that offshore produces more cash over the life of a well, but they do not have the budget necessary to pay the years of upfront expenses needed to justify sanctioning offshore projects.

My suspicion is that two things will change this favoritism towards shale over time. First, as oil prices have risen significantly off of their lows of early 2016, many oil majors are again able to generate enough internal cash flow to pay their dividends and fund capital expenditures. With more cash flow available, oil companies will again look towards offshore as it generates more cash over time.

The second reason is that depletion is very soon going to be an enormous problem for oil companies. Last year, Chevron depleted more oil from its reserves than it discovered. This is simply not a sustainable business model and there will come a day when shareholders demand oil companies begin to increase reserves. This will no doubt bring the oil majors back to offshore, a place where almost one third of total global oil production is sourced from.

With the reports coming out this past week, investors in the beaten down offshore sector finally see the first green shoots of a recovery. Inquiries and rig tenders have increased globally and they are occurring at multiple companies. Two of the strongest players in the space, Noble Corporation and Diamond Offshore, are generating huge amounts of free cash flow at or near the bottom of the cycle. As these companies repay debt and prepare to buy distressed assets, they set themselves up for success as the cycle turns up for the first time in years. Given how negative the news has been, even just a sentiment shift can take these stocks significantly higher. Investors would be wise to not wait for the recovery to begin, but rather to use this opportunity while the news is still terrible and the situation is clearly improving, to aggressively build positions. The offshore sector is crucial to the global economy. The sector has to survive and the Diamond Offshore and Noble Corp will emerge as winners. Their stock prices trade around at levels that are 90% below their all time highs. Considering their valuations, and the emerging positives, the stocks represent an incredible opportunity to make huge gains in this market with most of the risk already well priced in.

Disclosure: I am/we are long NE, DO, ATW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Green Shoots Appearing In Offshore Drilling - Seeking Alpha

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Saqib Rahim, E&E News reporter

HAUPPAUGE, N.Y. States advancing offshore wind want everything they've seen in Europe: cheap, low-carbon power and the jobs that come with it.

They may soon find themselves having to choose between those aims, a panel of European industry executives said here yesterday.

Jonathan Cole, a managing director with renewables giant Iberdrola SA, said European countries did.

"What do they want in this sector? Do they want the cheapest unit cost of electricity? If so, consider the Dutch model," Cole said at the U.S. Offshore Wind conference. "Do they actually want to build a long-term sustainable industry? If so, they need to think, certainly for the first few units, about something different."

Cole said the Netherlands focused its policies on building the cheapest turbines, but that meant it had to import the units. Germany and the United Kingdom were less price-sensitive, but that drew more technological innovation to their shores.

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The remarks frame the dilemma before Maryland, Massachusetts and New York, as well as other states hoping to make offshore wind a contributor on the scale of nuclear and coal plants.

These states want zero-carbon electrons but also hope to jolt manufacturing. And they'd prefer not to be blamed for raising utility bills.

European companies say if states want to see that, they need to make firm promises measured in gigawatts.

Europe has built about 3,600 turbines, and the industry says it's reaching new economies of scale that are driving costs down. In April, the world's largest developer, Denmark-based Dong Energy, won an auction with two projects that were economical without any subsidy.

The industry says it can wring out more cost from economies of scale and larger turbines that harness more wind. One informal goal: getting costs under 10 cents per kilowatt-hour.

"The two fundamental drivers in the end are scale and competition," said Sven Utermhlen, chief operating officer at E.ON Climate & Renewables.

Northeast states are grappling with how that looks in America.

Smaller offshore wind projects have come in around 20 cents/kWh, said Willett Kempton, a professor at the University of Delaware.

On a grid fueled by nuclear, natural gas and onshore wind, 20 cents is well above market. So New Jersey and Maryland have offered special subsidies for offshore wind projects that can show economic benefits, whether in the form of jobs or local content.

New York is touting the size of its offshore wind resource, which it pegs around 1 gigawatt, and the promise of scale. Massachusetts has emphasized cost reduction: Each round of bids has to be cheaper than the last.

Several factors came together in Europe to drive down costs, the panel said.

One was heavy competition among manufacturers. The market consolidated around three main turbine builders Siemens AG, General Electric Co. and MHI Vestas Offshore Wind that are now locked in fierce competition.

Another was the long-term policy commitment to growing offshore wind, the panel said. Europe has installed around 12.6 GW of offshore wind. U.S. commitments amount to 4-5 GW.

Cole said that's nowhere near enough to get a factory for nacelles and blades, which are the most valuable parts of the turbines. To get factories for those, he estimated, the United States would have to build 3-4 GW a year.

"There are many reasons this will come, but it will not start with the nacelle. Nacelles will be the last component," said Kempton.

"There is plenty of other stuff which I think makes absolutely no sense to be manufactured outside the U.S., if we want to have a U.S. offshore wind business," said Utermhlen. "Cables. Foundations. Vessels. I think there's plenty of opportunity there."

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OFFSHORE WIND Jobs or cheap power? Experts say US can't have both - E&E News

Royal Bank of Scotland (RBS) is f acing a union backlash amid plans to cut more than 250 tech staff and offshore dozens of jobs to India.

The bank informed staff on Tuesday that it would be letting go of 154 contractors by year-end, while 180 permanent roles have been put at risk - with a total of 92 staff positions set to be axed.

It also emerged that RBS is on track to offshore 38 tech roles to India.

The move comes just months after chief executive Ross McEwan ordered a 2 billion four-year cost-cutting drive, which is widely expected to result in significant job losses and branch closures.

An RBS spokesperson said: "As RBS moves towards becoming a simpler, smaller bank UK focused bank, we're continuing to restructure our back office support and reducing its size so it's a better fit for our business.

"Unfortunately, these changes will result in the net reduction of 92 roles.

"We understand this will be difficult news for staff and we will be offering support to those affected, including redeploying people into other roles where we can".

The cuts are expected to affect tech staff across a number of the bank's departments including risk solutions, digital engineering services, finance solutions, core and payments, and NatWest markets technology.

Rob MacGregor, a national officer at Unite, said the union has hit out at the bank over the job cuts and is now now calling on RBS to introduce a moratorium on the offshoring of jobs.

"Unite cannot understand how RBS, which continues to be taxpayer-backed, can justify hundreds more staff cuts and continue transferring important work out of the country.

"It is wholly inappropriate and unjustified for these technology roles to be sent offshore. Unite has called on RBS to halt the offshoring announcements and impose a moratorium on the offshoring of jobs.

"The loss of these jobs to India does nothing to support the well-being and livelihood of UK workers and their families. This is not in the taxpayer interest."

The union is also pressing RBS - which is still 72% owned by the Government - to guarantee that there will be no forced job losses as a result.

The news comes just days before RBS faces investors at its annual general meeting in Gogarburn, Scotland on Thursday.

Shareholders in RBS are being urged to cast vote against a new remuneration policy, which makes Mr McEwan eligible for a long-term award of 175% of his salary, and finance chief Ewen Stevenson 200%.

The vote on the bank's executive pay policy will be binding.

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RBS faces union backlash over plans to cut staff and offshore jobs to India - Belfast Telegraph

ISLAMABAD: The Supreme Court on Tuesday continued hearing a case filed by PML-N leader Hanif Abbasi seeking disqualification of Pakistan Tehreek-e-Insaf (PTI) chairman Imran Khan.

A three-member bench, headed by Chief Justice Saqib Nisar, ordered Imran Khan to submit affidavit along with his response in the case relating to his offshore companies after lawyer Akram Sheikh, representing Abbasi, requested the court to disqualify Imran Khan from the National Assembly.

Justice Saqib Nisar, in his remarks, said that the petitioner has raised objections encompassing five clauses against the PTI chief, of which the party funding matter is the most prominent.

The Chief Justice questioned Akram Sheikh if he wanted Imran Khan disqualified based on the decision of the minority, in a pointed reference to the Panama case verdict. To this, Advocate Akram Sheikh replied that it is the majoritys decision which counts and that this case was separate from the Panama case.

Imran Khans lawyer Naeem Bukhari said all documents relevant to the case have been submitted to the court. He added that he would submit Imran Khans affidavit on Wednesday.

The apex court on Monday issued a notice to Imran Khan, asking where he got the amount from to buy his Bani Gala house.

A Civil Miscellaneous Application submitted to the court stated that an amount of US$660,693 was transferred by Imran's ex-wife Jemima to the account of Rashid Ali Khan in Citibank, the operations of which have now ended, during 2002-2003.

In one of his statements, Imran had said he had taken a loan from Jemima for his Bani Gala residence. The ownership of the issue remained unclear because the money Imran needed to complete the payment was around Rs30 million, while the amount transferred during that period was more than that was required.

PML-N leader Daniyal Aziz, speaking to media earlier today, said that Imran Khan had been granted a seat in charity back in 2002.

From where did PTI get enough power to shut down the capital? he questioned.

PML-Ns Talal Chaudhry pointed out that Imran Khan had asked the Prime Minister for accountability dating as far back as 50 years.

We are simply demanding a few years worth of accountability from Imran Khan, he remarked.

Hanif Abbasi vowed to put an end to Imran Khans politics. In a few days we will put an end to the dirty politics of Imran Khan and Jahangir Tareen.

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SC orders Imran Khan to submit affidavit in offshore companies case - Geo News, Pakistan

STOCKHOLM Iceland has proposed a further easing of capital controls imposed during the global financial crisis by raising the amount of money individuals can transfer from locked offshore Icelandic crown accounts to nearly $1 million (773,080).

Around $2 billion in foreign money, most belonging to U.S.-based funds, is held in such accounts and under government proposals put forward last week depositors will be able to withdraw interest payments, indexations and dividends totalling 100 million Icelandic crowns (727,871) per year.

Iceland's coalition government is likely to get the proposal, which lifts the limit from the previous level of 1 million crowns, through with its slim majority.

The government said in mid-March that the remaining capital controls, imposed in 2008 to stop money from flooding out of the country, would be lifted, easing restrictions on businesses and households.

As part of the process, the central bank is currently buying back offshore crown assets from foreign funds.

(Reporting by Ragnhildur Sigurdardottir; writing by Johan Sennero; editing by Alexander Smith)

LONDON Early indicators on Sunday showed the euro topping $1.10 for the first time since the U.S. election results, according to data from trading platform EBS, on reports of polls showing Emmanuel Macron on course to win the French presidential election.

LONDON The euro topped $1.10 for the first time since the U.S. elections on Sunday and climbed to a one-year high against the safe-haven yen on relief that Emmanuel Macron had beaten the far-right Marine Le Pen to clinch the French presidency.

BEIJING China's foreign exchange reserves rose in April for a third straight month, beating market expectations, as capital controls and a pause in the dollar's rally helped staunch capital outflows.

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Iceland plans to lift limit for offshore crown transfers | Reuters - Reuters

UKs oil major BP saidon Monday that together with its joint venture partner Kosmos, it had made a major gas discovery offshore Senegal off the West African coast.

BP and U.S.-based Kosmos Energy commissioned the drilling of Yakaar-1 exploration well in the Cayar Offshore Profond block. Kosmos Energy estimates Yakaar-1 discovered a gross P mean gas resource of around 15 trillion cubic feet (Tcf), in-line with pre-drill expectations, the Dallas-based company saidin its statement on the discovery.

According to BP Upsteam chief executive officer, Bernard Looney:

This discovery marks an important further step in building BPs new business in Mauritania and Senegal. We look forward to results from the additional exploration wells planned for 2017.

Both BP and Kosmos believe that the Yakaar discovery, coupled with the Teranga discovery made last year, have enough resources to support the creation of another LNG hub in the basin.

The gas discovery offshore Senegal adds to a crude oil discovery off the Senegalese coast made earlier this year by Australian exploration company FAR, which saidthat it had discovered more than 1.5 billion barrels of crude as a result of a 3D seismic study.

At the end of last year, BP said that it has signed agreements with Kosmos Energy to acquire a 62-percent working interest, including operatorship, of Kosmos exploration blocks in Mauritania and a 32.49-percent effective working interest in Kosmos Senegal exploration blocks. Back then, BP said it would invest nearly US$1 billion, mostly in the form of a multi-year exploration and development carry to buy offshore Blocks C-6, C-8, C-12 and C-13 in Mauritania and an effective interest in the Saint-Louis Profond and Cayar Profond blocks in Senegal.

Related:Saudi Oil Minister: OPEC Output Cut Could Extend Into 2018

In April, BP agreed to buy another 30 percent in the Saint-Louis Profond and Cayar Profond blocks offshore Senegal from Timis Corporation, subject to government approval. Upon completion of the deal, BP will hold participating and effective working interests close to 60 percent, Kosmos -30 percent, and Socit des Ptroles du Sngal (Petrosen) 10 percent.

By Tsvetana Paraskova for Oilprice.com

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BP, Kosmos Energy Make Major Gas Discovery Offshore Senegal - OilPrice.com