The drilling industry has witnessed a significant downfall in the last few quarters. With WTI Crude price struggling to stay above the $60 per barrel mark for a sustained period, drilling companies are experiencing a slow pace of recovery. This lean period forced drillers to cut costs to a bare minimum, and look for innovative ways to churn out more oil and gas. Impressively, they managed to do just that by improving drilling techniques. While this has improved profit levels to an extent, the sentiment around the industry still remains mostly negative.
Industry Performance
Let’s take a look at the price performance of the oil and gas drilling industry. In the past year, the S&P 500 Index has improved 2.3% against the oil and gas energy sector’s 23% slump. During this period, the drilling industry plunged a whopping 55.7%. Moreover, the industry currently ranks in the bottom 26% of the Zacks Industry Rank.
Headwinds Plaguing the Industry
Explorers and producers kick-started 2019 with a conservative capital budget as they witnessed massive crude downturn during the fourth quarter of 2018. Moreover, explorers are more bothered about bottom-line growth — being forced by investors following years of dull returns — than oil and gas production. Hence, conservative spending by upstream companies is likely to hurt demand for drilling services.
Environmental groups are pushing politicians to take necessary regulatory steps to reduce hydrocarbon consumption. Recently, the United States House of Representatives passed two bills, which ban new offshore oil and gas drilling in the Pacific and Atlantic coasts. Several environmental groups are lobbying the United States Senate to follow suit. Notably, in Europe, Irish Prime Minister Leo Varadkar pledged to phase out oil exploration in the country’s territorial waters.
Low oil price, triggered by a dampening global demand outlook and oversupplied market, had kept a lid on upstream projects. Especially in the offshore drilling scenario, low crude prices delayed final investment decisions for several major projects. Decreasing cost of production — attributed to operating efficiency gain — is helping the industry to recover but slowly. The situation had led to lower revenues for many offshore drillers including Diamond Offshore Drilling, Inc. DO, Noble Corporation plc NE and others. While Diamond Offshore’s revenues decreased for eight consecutive years, we saw Noble Corp.’s top line decline seven times in the last decade.
Downward Estimate Revisions
Due to the reasons stated above, the drilling industry has witnessed negative earnings estimate revisions by brokers. As such, the Zacks Consensus Estimate for 2019 and 2020 has been revised downward, as depicted in the figure below.
Weakness in the drilling industry is haunting the companies that are part of it, including Helmerich & Payne, Inc. HP, Independence Contract Drilling, Inc. ICD and others. Both these companies currently have a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Conclusion
The players in the drilling industry are now focusing more on cost reduction, technological improvements and efficiency gains. Major drillers are cold stacking their relatively older rigs and pushing forward high-end ones to boost margins. Companies like Transocean Ltd. RIG, given technologically advanced and versatile drilling fleet, are leading the course of the industry. Systematic and strategic plan of action can drive long-term growth for the drillers.
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