For the first time in 2016, oil prices touched $50 per barrel on May 26. Prices recovered from the multiyear lows of $27 per barrel experienced in January this year. Oil prices are a key factor in the fate of offshore drilling companies.
Did anything change with price increases?
All the offshore drilling (XLE) companies have released their first quarter results. In the first quarter conference calls, companies reported that even after a substantial increase in oil prices, customers continue to cut activity. As oil prices increase, E&P (exploration and production) companies have stayed focused on strengthening their balance sheets. Due to the plunge in oil prices in mid-2014, E&P companies have seen their earnings plunge and debt has piled up. In the short term, this price increase will not improve the outlook for offshore drilling. Customers continue to renegotiate contracts and even terminate contracts.
Confidence in oil price stability over a longer term is required to see some changes in the offshore industry’s outlook. Statoil’s CFO, Hans Jakob Hegge, mentioned that E&P companies have cut capex for two years in a row for the first time. Plus, we could see a third year of capex cuts in 2017.
Even after a rise in oil prices, the outlook isn’t good for offshore drillers like Ensco (ESV), Seadrill (SDRL), Seadrill Partners (SDLP), Noble (NE), Transocean (RIG), Atwood Oceanics (ATW), Diamond Offshore Drilling (DO), Rowan Companies (RDC), Pacific Drilling (PACD), and Ocean Rig (ORIG).
Oil price expectations
According to Citigroup, the average price for a barrel of Brent oil will be $50 in the third quarter of 2016. According to Goldman Sachs brokers, oil prices should remain around $50 for the rest of this year and rise to $60 per barrel by the end of next year.