Needless to say, the BP ADR (NYSE: BP, Stock Forum) oil spill did some serious damage…
It continues to create havoc for marine life and human livelihood. And it has sent stocks in both the offshore drilling and oil services industries plummeting. That much is obvious.
But few people realize that the offshore drilling industry was in trouble well before the rig ever blew.
Back in 2008, drilling rig operation rates were nearly 85% in the Gulf of Mexico. But by last summer, they had collapsed to merely 45%.
Prices crashed too. Day rates for jackup rigs – the combination drilling rig and floating barges that make collecting oil so much easier – fell from $168,000 a day to just $78,000.
Conditions did go on to improve from there. Earlier this year, utilization rates rose to 63% and day rates to $115,000. But then the rig blew up. And that recovery became history.
The market may very well have overreacted… in which case, investors have a great buying opportunity on their hands. For that matter, so do companies.
Individual valuations within the industry have gone from cheap to dirt-cheap. And that has allowed players to expand through mergers and acquisitions at sharp discounts.
Norway’s Acergy and Subsea 7 Merge
Two Norwegian oil service companies made the first brave leap.
Acergy (NASDAQ: ACGY, Stock Forum) and Subsea 7 saw an opportunity and they went for it. Their merger is estimated at $5.4 billion.
Together, they form a global leader in seabed engineering and construction. And they reach across six continents.
The newly-merged company will keep the Subsea 7 name and Acergy’s Nasdaq listing.
And best yet, it really doesn’t have to worry about the Gulf of Mexico disaster. Less than 2% of its revenues will be derived from that area.
That shouldn’t change anytime soon either. By May’s end, the new Subsea 7 possessed an impressive $5.3 billion backlog.
Noble acquires FDR Holdings
Noble Corporation (NYSE: NE, Stock Forum) made an acquisition of its own recently.
The company itself looks cheap and is conservatively financed. With its clean balance sheet, management had the opportunity to purchase assets at distressed prices.
So that’s exactly what it did.
Noble is already the world’s second largest offshore drilling contractor. Only Transocean (NYSE: RIG, Stock Forum) tops it in that area. And it sports a fleet of 62 mobile offshore drilling units. That includes 43 jackups, 13 semisubmersibles, two submersibles and four drillships.
The company does derive 22% of its revenues from the Gulf of Mexico. But the remaining 78% comes from elsewhere, including Brazil, Mexico and the Middle East.
And now that already strong company has made itself stronger through a $2.16 billion cash deal. The target: Norway’s privately held FDR Holdings – a.k.a. Frontier Drilling – with its fleet of 7 vessels.
Noble believes the acquisition will add to its profits right away. And it foresees its cash flow benefiting from FDR’s $3.2 billion in contract backlogs. About 95% of that amount comes from Royal Dutch Shell (NYSE: RDS.A, Stock Forum).
The company also announced new agreements with Shell for 10-year contracts. Worth $4 billion for two ultra-deepwater drillships, those contracts fall through if the FDR one fails.
If everything goes through though, Noble’s backlog increases from $6.9 billion to $12.9 billion. While much of that is scheduled for 2016 and beyond, that’s a significant amount. And once again, only Transocean will top it in that area.
Oil services industry’s stock values…
Right now, stock values in the oil service industry reflect fear more than fact.
With the fate of drilling in the Gulf of Mexico at stake, investors expect the worst. And perhaps more importantly, they don’t see any potential elsewhere around the globe… including offshore Brazil, West Africa, east Asia and the Middle East.
Investors need to rethink that mentality though. Because if anything, the BP disaster will only hasten the need for larger, more diversified oil services companies.
That means a lot more merger and acquisition activity in the sector. So investors can make bets on which company gets taken over next.
Or they can stick with the safer plays such as Noble, with its healthy balance sheet and backlogs.
Disclosure: The author does not hold positions in any of the stocks mentioned