*SHALE PRODUCTION GROWTH AND PRIVATES*
I was a bit skeptical we can just attribute all the surprise in shale production growth to private E&Ps, but a research note from S&P seems to support this thesis too.
Further, this growth has been super concentrated - just 9 privates (out
$xle $xop $oih
Breakeven estimates for new oil wells from the recent Dallas Fed energy survey now vs. two years ago; the marginal Permian barrel cost has gone up from $54 to $70; probably why each $CL dip into the $60s has been fairly short-lived:
" $RIG is insolvent at 450k dayrates "
Here's a quick exercise using the Q3 numbers which are the latest reported:
adjusted EBITDA = $162m
revenue = $713m
average dayrate = $391,300
revenue if the dayrate was 450k = $820m
EBITDA if the dayrate was 450k = $269m
cash interest =
$SLB's Olivier LePeuch also saying 85% of offshore FIDs have $50 oil breakeven. Three reasons the breakeven has come down: (1) technology integration (2) better customer prioritization (3) tieback opportunities to existing infrastructure
$oih $borr $rig $ois $bkr
On the deepwater front, Transocean put up a new presentation today. Nice slide showing rig demand is projected to grow even at $40 oil; offshore services are turning from the most vulnerable segment of the energy space into the most resilient one $rig $val $ne $sdrl $oih
There's some disappointment with $RIG after the earnings, like the post below, and that's understandable- especially if you entered close to $9 (which is why you scale in gradually, right).
So probably easier for me to talk "long-term" when my cost basis is in the low $3s, and I
I am not impressed with the results for the 3rd Qt. for Transocean - $RIG. I don't like slipping into an operating loss YoY on the quarter; the lower utilization YoY - 49.4% vs 59.4%. Especially of concern is that the projections for dayrates are starting to slip: Q4 '23 416k vs
1/ Digesting $SLB's must-listen earnings call:
The international capex cycle continues:
This is why you need OFS stocks. Energy security/NOC driven growth isn't bullish for ShaleCos or
#COM
plays. Super bullish for OFS though.
More good news from $RIG:
"The estimated backlog of $392 million excludes a mobilization fee of 90 times the contract dayrate."
That is a $38m mobilization pmt on top of the $430k dayrate 😮 $OIH $IEZ $XLE
#oott
$RIG
Transocean Equinox has found work in Australia; based on the report, the
#dayrate
comes to $457,000 👏
It's in addition to mobilization fees but Norway to Australia journey ain't short $oih $xle $ne $val
First time in Las Palmas and I didn't realize it was an open-air rig museum.
From L to R:
1. $NE's stacked Pacific Meltem & Scirocco
2. $VAL's DS-7, supposedly being re-activated
3. DS-11, stacked
4. $NE's Faye Kozack - I assume just enjoying the "white space"
No $RIG's.
Of the remaining 17 cold stacked ultra-deepwater drillships reported by Woodmac, 9 are Transocean rigs. Statistically, any new re-activations in 2023 should involve $RIG drillships $VAL $NE $XLE $OIH
#oott
IMHO the $RIG selloff isn't about RIG as the entire $XLE/ $OIH sector including giants like $XOM and $SLB is getting pummeled. RIG is simply higher beta.
I took a look just now at RIG's credit spreads YTD:
1) 7.45% 15-Apr-27 unsecured notes OAS tightened by 65 bps
2) 7.00%
Note that pre-covid $RIG traded up to ~$7 before collapsing to a low of ~60c during 2020 on covid/fraudulent Whitebox litigation. History will repeat. Also $RIG trades at a consensus 2024 EBITDA multiple of 8x compared to $VAL at 9x so I have become confused about valuation.
*U.S. RIG TRENDS AND SHALE PRODUCTIVITY*
Two years ago commentators were negative on OFS because E&P capital discipline would leave services with little pricing power.
Well, we saw how "capital discipline" went, especially among private E&Ps. However and ironically, the OFS
Valuations in the offshore drilling group aren't really that disparate.
From high to low, EV/est. 2025 EBITDA:
$RIG - 6.8x
$BORR - 4.8x
$NE - 4.7x
$VAL - 4.5x
$SDRL.OL - 4.4x
$DO - 4.4x
$DDRIL.OL - 2.1x
Most are in a tight 4-5x range.
Transocean is an outlier on the upper
Goldman sees $115 Brent:
"Supply challenges are structural, based on years of underinvestment. While weakness may persist from factors such as higher real rates, USD strength, and recessionary concerns, longer-term physical tightness will not be easily resolved."
#oott
#oil
1/ $HAL following $SLB with EPS beat and divvy increase.
Nice articulation of the services thesis:
a) the world needs more oil +
b) rising service intensity = more services needed to produce the same amount of oil
$RIG's 7.45% April 2027 notes, which I watch the most as they are in my portfolio, have been doing well this week so I took a look at all other non-convertible debt too.
I have layered on top of the debt schedule the bid-ask midpoint as of today (note the quotes may vary a bit
$BORR's volatility won't hint at it, but in theory jack-ups demand is more robust than the demand for floaters and has seen smaller drawdowns:
One reason for the divergence has been the different customer mix. NOCs, which have more steady capex plans, have been increasing their
$RIG announcing new $1.5b private debt placement and getting corporate family rating upgrade from Moody's:
"Moody's Ratings expects Transocean to maintain adequate liquidity" 😂
Dk the pricing but the new '29/'31 notes will replace '25/'27 debt = stretching maturities 👍
1/ Good to also see $RIG being more specific on the stacked rigs:
"With 12 total cold stacked assets, we have the most operational leverage within our peer group and significant upside potential in a rising market, particularly given the quality of our assets"
$NBR $ESI.TO $PD.TO $PTEN $HP $OIH
The trend toward longer horizontal wells in U.S. shale may be a partial explanation for why U.S. production has seemingly exceeded expectations despite lower rig counts.
However, Helmerich & Payne mentioned that each rig is now also drilling
$xle $xop $oih
#oil
#copper
One reason the macro picture (and particularly commodities demand) is so blurry is that the world's major economies are so out of phase with each other.
Whatever narrative you believe in, you can find data points to support it.
$ec $xle
Short Ecopetrol note based on a couple insights I saw in some recent research.
The first part is the forecasted production profile from S&P Commodity Insights:
$EC should see a slight increase in 2024 production to 725-730 kboe/d, up from 720 kboe/d in 2023.
However,
With all
#DeepWater
bullishness in my feed, it was quite a shocker to see retail dumped drillers last month (S&P's capital flows analysis):
At the end of the day, I guess the big bad "white space" did scare away folks 🤷♂️
Noteworthy though, institutional investors bought quite a
Just wanted to clarify that Transocean's registration filing announced today relates to insider Perestroika's exercise of its conversion option under the '27 exchangeable bonds back in April. This is old news and the dilution had already happened $rig
Borr Drilling has also uploaded a new presentation. Not much new content but there's a good chart visualizing fleet age for the JU players.
You could maybe say $BORR is the $RIG of jack-ups 😉
$DO says will be "disciplined" about reactivating the stacked Onyx or purchasing a stranded newbuild.
Macro view agrees with $rig $ne $val and good to know they track subsea tree orders as leading indicator. Need to pay more attention to $fti 👍
As for $BORR itself, once all contracts rerate, $750m EBITDA/y could be within reach:
24 rigs x 175k/d rate x 365 days x 95% util x 50% EBITDA margin = $728m
Current EV is only 4x that; also debt: mkt cap is 50:50 so there's opportunity for $RIG-like torque to unfold
DYODD
$BORR
With all the excitement about deepwater, don't forget about shallow water drilling either; the JUs orderbook is at 20 year lows and delivery times are 3+ years
So $100 million for 200 days for $SFL's Hercules rig = $500,000 dayrate, right? Round numbers make math easy😂
Hercules having to do a Canada-Namibia-Canada roundtrip also speaks to market tightness $rig $ne $val $oih
Finally made it to $RIG's transcript:
"We believe that as a result, day rates will continue to trend upward, especially for the higher specification ultra-deep water. In fact, by the end of the year, we expect leading-edge rates to exceed $500,000 per day"🙏
$oih $val $ne
$oih $rig $val $ne $do $sdrl $odl.ol $ddril.ol
Offshore drilling makes sense as a value investment even without 500k+ dayrates per street analyst Eddie Kim. Let's hope he truly believes that and Barclays isn't just making a play for some underwriting fees from these guys.
So $RIG backlog without options is now $9.2b. Sequentially this is +$1.2b but YoY from last July it's +$3.0b > TTM revenue of $2.6b.
It's a pity Deepwater Titan is stuck at 455k/day until Mar. 2028 but in bull cycles old rigs put to work last end up getting the highest rates🤷♂️
The pricing on $BORR's notes is out:
2028 tranche - 10%/97.75
2030 tranche - 10.375%/97.00
It's a lot of interest (~$150m p.a.) but stretching out the maturities and dealing with fewer lenders is a good thing.
Also 5% of the ~11% yields is just the risk-free rate.
For
Moody's rated $BORR's proposed $1.5b notes B3 (B-) while S&P is mulling BB- but preliminary.
Both cite the industry strength but S&P also sees less "energy transition risk" in shallow water due to shorter payback times. Their words, not mine.
BB- would be huge, let's see.
$oih $xle $slb $bkr $ois $rig $borr
We've heard much talk lately about the reversal in U.S. rig counts and
#OFS
stocks have retracted quite a bit.
However, the growth in the international rig count (land + offshore) remains uninterrupted:
(1/7)
$oih $rig $borr $slb
One pillar of the
#offshore
thesis is that shipyards, backlogged with
#LNG
carriers, can't build new rigs or OSVs. I put this chart together based on S&P's latest LNG shipping database. With an active fleet of 750, there are 309 (!!) carriers on order.
According to this old Norwegian research paper, the "magic utilization number" when dayrates in offshore rig markets go to the moon is 98%:
Obviously we're not there yet. The study uses a jack-ups dataset but extrapolates broader.
Corollary: The
OFS multiples via RBC. "Outliers" with low P/tangible BV:
$esi.to 0.3x
$nbr 0.5x
$pd.to 0.9x
$cfw.to 0.6x
$step.to 0.8x
All free cash flowing companies. Assets already went through impairments especially 2020. Complete market disregard for onshore energy services.
Well 🇳🇴, you had plenty of time to make up your mind and lock in some long-term contracts while the
#rig
market was still soft; now it's become you snooze, you lose🤷♂️
$eqnr $rig $val $ne $oih
#eft
$BORR
With all the excitement about deepwater, don't forget about shallow water drilling either; the JUs orderbook is at 20 year lows and delivery times are 3+ years
In contrast to Allan Gray, one of the largest institutional $RIG buyers in Q4 appears to have been Citadel.
Their record also looks more rational. They seem to have been buying from late 2020 into 2022, then scaling down do almost zero by Q3' 23 and then buying again in Q4:
Based on 13-F filings, the biggest $RIG seller in Q4 was Orbis Allan Gray, a South African asset manager.
They also sold $BORR but bought $VAL $NE $DO:
Based on the limited 13-F info, I'm not sure they made money on their RIG trade:
The 2017-2019 was at best a wash. More
$borr $shllf $oih
Longer historical perspective on real JU rates and utilizations and the non-linear relationship between the two when utilization gets to the high 90s.
This is the definition of "asymmetric opportunity" par excellence - and same for the floaters too btw.
According to this old Norwegian research paper, the "magic utilization number" when dayrates in offshore rig markets go to the moon is 98%:
Obviously we're not there yet. The study uses a jack-ups dataset but extrapolates broader.
Corollary: The
Energy services market outlook from Spears & Assoc:
23:10 Oilfield services outlook:
- Global rig count down -1% in 2024 but equipment and service spend up +7%
- International > Canada > US growth
27:40 US rig count and frac spreads:
- average 2024
$xle $xop $oih
Barclays also in the "plateauing drilling efficiency" camp. More rigs/more production maybe yes but further rig-less production growth seems no.
*US land rig breakdown/trends* 🧵
1/ While gas rigs are still falling, big add last week +20 in private oil rigs after several weeks of declines. Smaller add from large publics. Enverus data different from $BKR.
From the $OIH perspective, $NBR has added +2.
$BORR $SHLF $VAL $NE $RIG
Fitch rated y'day Borr's '28 notes B with positive commentary:
- positive industry trend
- high revenue visibility
- newer assets cf. Valaris and Shelf
- Most clients are NOCs
- PEMEX exposure a negative
Rating agencies tend to be conservative too!
Let's be honest - the Saudi announcement at face value is NOT bullish for $BORR $NBR or other OFS names with Saudi exposure.
Now is $BORR -10% in the pre-market overdone? Likely yes but we'll have to wait and see Aramco's actual capex announcement.
Even more relevant than oil price for $xle companies may be what they make out of it; post-GFC $xom generated lower returns despite high prices until 2014; there are now signs the oil price to ROCE relationship is reverting to the higher trendline from the pre-GFC era
#oott
Besides the rising dayrates, the lengthening of the contract terms is another sign of the ongoing bull market in offshore rigs
#oott
$xle $oih $rig $borr $ne $val
$lbrt $pump $pten $acdc $hal $oih
Frac spreads may be decreasing but the margins per fleet are doing well compared to the pre-pandemic years.
One reason is likely consolidation - the top 4 U.S. players control 64% of the fleet vs. 42% back in 2018.
Wow, $BORR appoints as director ex-Goldman's Jeff Currie who just recently retired. Not sure Goldman under Currie had the best macro calls on oil, but I agree with what he says about Middle East jack-ups
2/ "Offshore" mentioned 35 times on the call (!!) but deepwater vs. shallow water isn't either-or:
That is why I own both $RIG and $BORR.
The $100 billion FID number for '24/'25 looks consistent with what I saw in a Rystad publication.
Commodity Insights rates $PBR $EC $YPF highest among NOCs on autonomy from governments; curious that all 3 in
#LatAm
and 2/3 in Left-run places. All 3 also score above median on technical capability though behind Aramco. Yet the market values them a bit like bottom-rated $PDVSA.
$oih $osx $xle $xop
Oilfield services remains the laggard among energy subsectors since the prior cycle topped in 2014. The mean reversion defining most commodities suggests services would be the space where you're most likely to find stocks that may outperform.
Nice article/no paywall:
"the industry is largely sold out"
"marketed utilization for 7th-generation drillships at 95%"
"6th-generation drillships have also increased to the low 90%"
$oih $rig $borr $val $ne $sdrl
Was doing research on $lbrt and wanted to put up multiples for the peer group; NTM estimates are from Refinitiv.
Top 5 most discounted are $pump $step.to $lbrt $cfw.to $nex with 1-2x ev/ebitda, 3-4x p/e and 1-2x p/cfps.
Still think the selloff wasn't justified
#oott
$xle $oih
Goldman:
"Energy's discount to the S&P 500 is close to the largest of the last 30 years"
And $XLE is largely $XOM and $CVX which have far higher multiples than the median energy stock!
#oott
$CFW.TO $STEP.TO $LBRT $PUMP $PTEN $ACDC $OIH
*FRAC UPDATE 11/26/2023*
While U.S. land rigs were +3 last week to 600, the frac spread count has been more impressive. Frac spreads are now +15% off the Sep. 1 bottom:
The frac spreads to rigs ratio started 2023 below the
@calvinfroedge
I've been to both Santiago and Buenos Aires. My 2c Santiago safer/more functional but Buenos Aires more happening. You will rarely get both aspects at once.
Which energy sub-group offers the best investment value right now?
Some thoughts below (long post).
Overall, the year has been flattish for the sector:
$XLE YTD total return +1.8%
$OIH, as services benchmark, +10.3%
$SPY, so far at +14.9%
However, on forward P/E basis, energy
1/ Great chart from GS' 2023 outlook visualizing the 2022 drop in
#China
#oil
demand; neither in 2020 nor during the Great Recession did China's demand drop so much; should be a strong tailwind for oil going into 2023 as China reopens
#oott
#eft
#ongt
$XLE $XOP $OIH
Jerome "Jack-Up" Powell may have done more for $BORR in a week than 10 jack-up rigs winning 200k/day contracts would; sometimes I wonder why even lose any time on fundamentals 🤷♂️
Who would have thought:
"The latest evidence of a pivot by oil operators from US shale to offshore appeared Oc.t 16 as the US Energy Information Administration warned that a drop in onshore production is accelerating into November"
$oih $rig $borr $ne
Couple observations on $RIG's "premium" valuation: (1) it isn't new; (2) it has actually been shrinking since the pandemic; (3) absolute valuations are still down a lot despite tremendous cost inflation.
Pareto's analysis doesn't fit with their "hold".
* PRIVATE vs. PUBLIC RIG TRENDS *
Based on a rig counting exercise from S&P, private operator horizontal rigs peaked last December at 347. The latest datapoint is 240, or -31% YoY.
For comparison Independents + IOCs together are only -8% YoY based on this data.
Also
Here's another supply-demand forecast for floaters and jack-ups, this one from the MS OFS update.
On the floater side, 164 "marketed floaters" in 2024 aligns exactly to what Esgian is showing now for drilling/warm stacked/under SPS rigs.
The demand numbers seem low though.
$oih $rig $ne $val
No dayrate reported but the long, 5-year contract for the 7 Gen Evolution is indicative of a bull market.
Of its 7 rigs, Stena now only has the Stena Spey semi available (from August) and that asset is from 1983.
After its recent bullish call on $DO, Capital One Financial initiates $RIG coverage with $8 PT.
The average street target now sits at $8.54 per Refinitiv.
Great post from Tommy as usual and thank you for helping visualize the real "white space" 😂
Yet most Twitter thinks the technical specs of the $VAL and $NE fleet are "no worse" than $RIG.
Puts the "cheap" vs "expensive" argument into a different perspective.
$RIG $VAL $NE $SDRL $DO $ODL.OL $TDW $OIH Deepwater Floating Rig Cheat Sheet. Oversimplified summary of deepwater rig fleets. Specifications generally matter more than age on deepwater floaters.
(1) RIG vs VAL vs NE vs SDRL: RIG is deepwater focused with unique exposure to
Like the analysts, $HAL also expecting strong '25 growth in NAM. Further emphasizing the "fleet attrition" point we've also heard from the pressure pumpers and others.
$LBRT $PUMP $PTEN $NBR $OIH
BofA expects onshore OFS activity to turn around in 2025 on "LNG" and to prevent U.S. oil production from falling. Key assumption = oil in $75-$90 range.
If so, I would expect onshore services stock prices to lead by ~6 months.
Despite the U.S.
#deepwater
GOM being a very mature basin, S&P Commodity Insights sees it producing "into the latter part of the century". Shale will be long gone by then. This means the demand for offshore services $OIH also has a long runway ahead.
@MugsLuck
It is the underlined guys. I would be happier if they were already converted. I think having them around drives some bad optics:
1. Worse D/E ratio, the debt could be 10% less
2. They are also hedged by shorting the equity which drives the high short interest that also makes
$xle $xop $oih
Aramco's CEO at Davos:
- oil demand at 104 million bbl/d in '24
- spare capacity ~ 3.5%
- "Good growth and demand is very healthy in China"
Yes, he's talking his book but similar messaging from other actors.
$BORR earnings are out. I don't put much importance on the $0.00 vs. $0.07 miss.
FY'24 EBITDA guidance $500-$550m = 6x EV multiple
Average Q3 dayrate $132k cf. implied dayrate in backlog of $161k = the re-rating continues
AIG adds more shares
Wall St targets +50% upside
$BORR $SHLF $VAL $NE $RIG
Fitch rated y'day Borr's '28 notes B with positive commentary:
- positive industry trend
- high revenue visibility
- newer assets cf. Valaris and Shelf
- Most clients are NOCs
- PEMEX exposure a negative
Rating agencies tend to be conservative too!
$oih $rig $ne $val $sdrl $borr
Retail sold drillships again in November. What's up people? 😲
Meanwhile institutions bought though less MoM.
More noteworthy that institutions did so as they dumped other energy.
Conclusion: Institutional guys don't read Pareto 😂