Offshore drilling and service stocks were up big yesterday. Some of the stocks were up over 10% with many breaking out from bases.
Why the sudden interest in offshore?
For the the last ten years the shale boom in the US has been the primary area reason for oil supply growth in the world. The problem is that the various shale basins are reaching their peaks. The Bakken and Eagleford shales have already reached their peak.
The last major oil shale basin that is still growing, the Permian basin, is reaching the end of its growth in production. As Adam Rozencwajg of Goehring & Rozencwajg, resource asset managers stated in their recent Q1 2023 report, the Permian is depleting faster than people think.
The most crucial development in global oil markets is depletion in the Permian basin. We first warned about this in 2018, predicting the Permian would peak in 2025. In retrospect, our analysis was too conservative. We now believe the basin could peak within the next twelve months. The implications will be as profound as when United States oil production peaked in 1970, starting a chain of events ultimately sending prices up five-fold over ten years. If we are correct, this could not come at a worse time for oil markets: inventories are tight, production in the rest of the world is declining, and investors are incredibly complacent.
Unless the world finds another Permian basin than there will be no alternative than to develop offshore resources. There are plenty of resources offshore but they have been under-invested in as the shale development in the US sucked all the capital in at the expense of longer lead time developments like offshore oil.
That is now changing and we are seeing this increased offshore activity reflected in dayrates for rigs:
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The chart above is definitely in an uptrend. We will likely see $500k/day and I suspect $600k and above at some point.
I believe this cycle will move higher and last longer than previous cycles.
In the past, as dayrates moved higher and cashflows expand at these companies the management would of course order more rigs. This would eventually lead to an oversupply of rigs which would crash dayrates and create a down cycle in offshore rigs.
Because this business has been crushed during the past downturn (it was arguably the worst downturn ever) there is very little appetite to go out and build new rigs. In addition, who is going to build an asset for $1 billion dollars when there is no certainty you will be able to recover your costs and make a profit as rigs are 25-year life assets(remember oil is going away we are told).
Well-known value investor and Tidewater board member had some interesting comments on why this is such a great opportunity.
I expect higher cashflows which will be returned to shareholders via buybacks and dividends.
The offshore service sector is similar to other industries and businesses we are invested in inside the Actionable Intelligence Alert Newsletter. Businesses that have been ignored and under-invested in for many years. Demand now exceeds supply and we are reaping the benefit of the increased rates and prices for these assets.
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