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May 3, 2004

S&P sees better times ahead for offshore drillers

Over the last decade, return on capital employed (ROCE) has been poor for the eight largest offshore drilling companies, according to an institutional research report by Standard & Poor's Equity Research Services.

There have been short periods of overall strong returns, such as during an industry upturn in 1998, but for the long-term investor, offshore drillers--with the exception of two companies--have destroyed value on a risk-adjusted basis, says the report.

The report--"Offshore Drilling: What Happened to Returns?"--was released by Standard & Poor's, a leading provider of independent investment research, ratings and indices.

"Although during the two past cycles--1998 and 2001--investors who timed the market well would have had realized superior returns, from the long-term investor perspective, offshore drillers as a group have destroyed value on a risk adjusted basis. From a return perspective during the past decade, ENSCO and GlobalSantaFe exhibited the highest returns, while Transocean was the worst performer," says John Kartsonas, Oilfield Services & Drilling Equity Analyst, Standard & Poor's Equity Research Services.

"Despite these past results, however," says Kartsonas, "we believe the group should perform well from this point forward. Fundamentals continue to be very strong, with oil prices approaching record levels and global demand high. We believe time will work in favor of the drillers. As demand continues to increase and supplies become scarcer and more difficult to develop, the demand for offshore drilling should continue to increase.

"We believe we are at the beginning of a major cycle, which is going to last for a longer period of time than previous cycles, and should provide greater returns for existing shareholders who have a long-term investment horizon and the patience to wait," concludes Kartsonas.

Standard & Poor's currently maintains a neutral outlook for the oil & gas drilling sub-industry and a marketweight recommendation for the energy sector. Standard & Poor's Equity Research Services ranks the shares of GlobalSantaFe Corp. (NYSE: GSF) an "Accumulate" (**** out of *****) at $26.65 per share, ENSCO (NYSE: ESV) a "Buy," (***** out of *****) at $27.69 per share, and Transocean Inc. (NYSE: RIG) a "Hold," (*** out of *****) at $28.16 per share.

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