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Optimistic Outlook for Offshore Drilling as E&P Capex Surge

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A noteworthy transformation is taking place in the global offshore rig market, where there is a shift in capital expenditure (capex) dynamics. This shift, highlighted in investment bank Evercore ISI's Offshore Rig Market Snapshot, has been occurring since early 2023, relocating from North America to international markets.

The driving forces behind this change include the decline in natural gas prices in the United States, leading several rig owners to redeploy their vessels to international waters. This movement is further propelled by improved economics in offshore operations, making exploration and production (E&P) activities more appealing in this sector.

We expect the favorable offshore dynamics to drive activity, and that, in turn, would translate into opportunities for equipment providers like SLB (SLB - Free Report) as well as offshore drillers like Seadrill Limited (SDRL - Free Report) and Transocean (RIG - Free Report) .

Offshore E&P Capex to Take Off

Evercore predicts that spending on exploring and producing oil and gas offshore will grow significantly, possibly exceeding $200 billion in 2024 and even reaching $234 billion by 2027. This growth is expected to impact various aspects of offshore drilling, including the number of rigs, support vessels and daily rates. The overall interest and investment in the global offshore Oil/Energy sector are strong, with $116 billion allocated for offshore oil and gas projects receiving Final Investment Decisions (FID) in 2023, surpassing the average of the past 10 years. Notably, deepwater drilling has shown a positive trend, marking a reversal of a seven-year decline and outperforming other related sectors.

Improving Economics

This trend finds further affirmation in insights from Rystad Energy. The consultancy firm notes substantial improvements in the economics of offshore deepwater operations. With an average breakeven Brent price of $40 per barrel, these projects demonstrate greater economic viability than various other oil plays. At a Brent price of $70 per barrel, the internal rates of return for offshore deepwater projects surpass 30%, fostering heightened demand for offshore E&P spending.

Increased Deepwater Drilling

The prevailing surge in offshore activities is defined by a notable pattern —improved levels of deepwater and ultra-deepwater drilling. International forecaster Wood Mackenzie anticipates a 60% increase in the production of deepwater oil and gas by 2030, making up 8% of the total upstream volumes churned out. In particular, the output from ultra-deepwater sources is projected to experience significant growth, making up half of the entire deepwater production by 2030. The industry remains optimistic, buoyed by rising day rates, prolonged contract durations, and an increased demand for both deepwater and ultra-deepwater drilling.

Which Companies Will Benefit?

Let’s look at some of the beneficiaries of this offshore exploration boom:

SLB: SLB is a leading oilfield services company, providing services to oil and gas explorers, and producers across the world. Through oilfield services contracts, SLB helps the upstream energy players to locate oil and gas, and to drill and evaluate hydrocarbon wells.

The world’s largest oilfield services provider should get a considerable boost from the increase in offshore exploration. In fact, around half of SLB’s international revenue could be attributed to the offshore business. Therefore, a positive market dynamic will lead to growth in the Zacks Rank #3 (Hold) company’s well construction, reservoir performance, and production systems units. In other words, the resurgence in offshore activities is expected to improve SLB's business and contribute to its steady growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Seadrill: Seadrill is a market-leading international driller with strong exposure in key strategic basins like the U.S. Gulf of Mexico, Brazil and Angola. SDRL has transformed its capital structure through accretive transactions and continues to deliver operational excellence.

The leading offshore contractor is poised to benefit from the revival in offshore exploration and spending. The company's sophisticated fleet of drilling rigs, together with its operational efficiency, positions it nicely to secure contracts in the expanding offshore market. With exploration activities ramping up across regions, Seadrill stands to capture new opportunities and generate significant revenues.

Transocean: Switzerland-based Transocean, Inc. is the world’s largest offshore drilling contractor and leading provider of drilling management services. The company provides rigs on a contractual basis to explore and develop oil and gas.

Quite clearly, Transocean, with its modern and versatile fleet, stands to gain from the anticipated growth in offshore spending. The company is well-positioned to provide its services amid the increasing demand for offshore exploration services. In particular, RIG's expertise in engaging in high-specification drilling jobs makes it an ideal partner for energy firms embarking on offshore projects.

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