Oil companies’ upturn expected to spread slowly to drilling

Oil companies are on the road to recovery thanks to rising oil prices, but their appetite for new investments is restrained. As a result, the troubled drilling sector must exercise patience as it waits for activity levels to improve, two stock market analysts tell ShippingWatch.

Photo: Carsten Rehder/AP/Ritzau Scanpix

In spite of increasing demand for oil and gas, which is boosting oil companies’ revenue, drilling outfits are unlikely to pull away from the long-standing stagnation until sometime in this autumn.

In an interview with ShippingWatch, two stock market analysts conclude that oil companies will be hesitant to invest in new production as oil and gas market forecasts remain uncertain.

“We are definitely not going back to investment levels that we have seen historically,” says Magnus Olsvik, Equity Research Analyst at Kepler Cheuvreux.

“Last year, oil and gas investments were basically put on hold. We think that in 2022 and 2023 we will see investment levels higher than in 2020, but they will not be on the same level as in 2014, for example,” says Olsvik.

He expects that drilling companies, having long faced weak earnings, will have to hold their breath for a while yet because demand for their services won’t take off noticeably until sometime next year.

“2021 will still be quite a challenging year, and then we expect to see a small increase in 2022 and 2023,” says Magnus Olsvik.

To prepare for a decarbonized future as part of the green transition, several major oil companies have begun to reinvest their profits in renewables.

Olsvik expects that this development stands to gain momentum, meaning that the oil industry will focus on already established production with infrastructure in place to ensure their cashflow in the short term.

Olsvik will not rule out that the oil prices will continue to increase, leading oil companies to increase their investments in production to a greater extent than the signs are indicating at present. If there were to happen, it could pave the way for substantial growth in the whole sector.

Expects upswing in the fall

Stock market analyst Gustaf Amle from Fearnley Securities agrees that oil companies are reluctant to invest, but he is confident the drilling sector will see an upswing this year.

“I think the activity level will increase over the course of the fall, particularly for floating rigs, and we expect an increase in demand in 2022 and 2023 with improved daily rates,” says Amle.

He envisions that daily rates will settle around USD 250,000, giving the companies a more stable revenue base. In his view, a number of drilling companies are better prepared now, despite the crisis, than they were before.

One reason is that several companies have gone through stints with bankruptcy protection and restructurings, allowing them to shave off a substantial share of their debt. These include players like Noble Corp, Diamond Offshore and Valaris, which earlier this week announced that it had completed its rescue plan and could now part with its bankruptcy protection.

Another is that the Covid-19 pandemic has made the companies more “disciplined” when it comes to utilizing their assets. He expects that the sector will see further consolidation for some time to come.

“Companies that have gone through Chapter 11 bankruptcy protection will have an edge, as it will be easier for them to conduct transactions on account of them having trimmed their debt,” says Amle.

English Edit: Christoffer Østergaard

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