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The Zacks Analyst Blog Highlights: Hercules Offshore, Transocean, Diamond Offshore Drilling, Ensco and Seadrill Partners

CHICAGO, April 14, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Hercules Offshore Inc. (Nasdaq:HERO-Free Report), Transocean Ltd. (NYSE:RIG-Free Report), Diamond Offshore Drilling Inc. (NYSE:DO-Free Report), Ensco plc (NYSE:ESV-Free Report) and Seadrill Partners LLC (NYSE:SDLP-Free Report).

Zacks Investment Research, Inc., www.zacks.com.

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Here are highlights from Friday's Analyst Blog:

Will Offshore Drillers Continue to Sink?

 

Being an offshore driller is just not fun right now.

 

Year-to-date, shares of major companies have significantly underperformed the broader market. In particular, stocks of Hercules Offshore Inc. (Nasdaq:HERO-Free Report), Transocean Ltd. (NYSE:RIG-Free Report), Diamond Offshore Drilling Inc. (NYSE:DO-Free Report) and Ensco plc (NYSE:ESV-Free Report) are down approximately 32.8%, 17.0%, 15.7% and 12.9%, respectively, while the broad-based S&P 500 index have remained flat over the same period. What's more, according to some analysts, the worst is still to come for these drillers.

 

The most pressing concern for the group, at least in the short-term, will be oversupply in the rig market. With multinational energy biggies looking to reign in their skyrocketing capital expenses, the offshore drilling space is likely to see intense competition, as multiple firms run after a single contract. This excess capacity, in turn, could lead to lower utilization or dayrates.    

 

Secondly, the offshore contract drilling industry is perceived to be a highly cyclical one and the current thought is that rates had already peaked for this cycle back in late 2013. As the sector looks set to enter a cyclical downturn, drillers will prefer to hold on to their higher technology specification rigs, thereby significantly denting the company's fleet utilization and profitability.

 

Last but not least, while most of the drillers boast of billion dollar revenue backlogs, they are struggling with idled rigs – or the ones without contracts – in a slack market. On an average, just about two-thirds of available deepwater rigs for 2015 have been able to find customers. Even for this year, a number of drilling rigs remain uncontracted.  

 

Worryingly, investors do not see an immediate rebound in the sentiment and expect more punishing times ahead. In particular, legacy drillers like Transocean and Diamond Offshore – with their lower-end rigs – look to be in most trouble. This is clearly evident from the high percentage of their float that is sold short. Currently, the short interest ratio in both of them is higher than 6.0, suggesting a considerable level of bearishness. Their Zacks Rank #3 (Hold) also indicates that investors should wait for a better entry point before accumulating shares.

 

However, one can look at Seadrill Partners LLC (NYSE:SDLP-Free Report) as a good buying opportunity in the offshore drilling space. The Zacks Rank #2 (Buy) firm has an attractive yield and a robust near-term growth plan.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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