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Updated Rig Forecast Affects Our Offshore Driller Valuations

Our long-term industry assumptions have grown more pessimistic.

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After reviewing our long-term forecasts, we have revised our fair value estimates for the offshore drillers we cover.  Diamond Offshore Drilling (DO) moved down to $7.25 per share from $10.50,  Transocean (RIG) moved up to $6.75 per share from $6.50,  Ensco Rowan (ESV) moved down to $10.25 per share from $15, and  Noble (NE) moved down to $1.50 per share from $2.50. Our no-moat ratings for each of the companies are unchanged. With the exception of Transocean, our fair value estimates moved significantly down as a result of more pessimistic long-term industry assumptions.

In the floater market, we now forecast a midcycle (2028) rig supply of 240, about in line with year-end 2018 levels of 242, as we forecast 29 rig retirements being nearly offset by 27 rig newbuild deliveries, most of which were ordered before the industry downturn. We forecast rig demand to increase from about 125 in 2018 to 170 in 2028, but this will only be enough to lift utilization to about 71%. Low utilization will result in day rates remaining about 20% below 2014 (pre-downturn) levels.

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Preston Caldwell does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.