Tuesday, April 21, 2009

>Offshore rig sector (FIRST GLOBAL)

The Story…

The offshore rig sector has recently been witnessing a sea of change. With very little activity from the time when crude oil prices spiked and tanked in the early 80s, the offshore drilling and exploration space has remained quiet over the years. While the first Gulf War did create some interest in the sector, it proved to be short lived. Throughout the 90s until almost 2006, nothing significant really happened in this space. However, from around 2006 onwards, the massive rise in crude oil prices suddenly made the offshore rig space one of the hottest sectors, led by strong demand, all time high day rates, and significant investments made by the players themselves for procuring new rigs (leading to increase in orders for ship builders), as well as by investors looking to make their fortunes. Stocks belonging to rig providers became the favourites in the market and rig service companies earned handsome returns with their high operating margins. Then came the oil price crash – one that we had predicted:

“It is our case. Nay, stand: Crude Oil will tank (short term bear market rallies notwithstanding) to below $90 by this year-end, and by our reckoning, should hit $50 in the next 12 months’ time.”

Until a few months ago, when it was widely believed that the oil prices would go nowhere but up, the entire upstream space had become red-hot. However, all that has now changed due to the recent steep fall in oil prices, which has resulted in a sudden change in investor sentiments towards the sector. To make matters worse, the fall in oil prices has been accompanied by a crash in the global financial markets due to the credit crisis. The combination of these factors has driven down the stocks of rig service providers.

To see full report: Offshore Rig Sector