Drilling investors must arm themselves with patience after listing

"At the present time, it is necessary to arm oneself with patience. One cannot expect that this is an industry which will go from crisis to triumph in a few quarters. The industry needs to do a lot of tidying up," says a share analyst.
Photo: Bloomberg
Photo: Bloomberg

Drilling companies have been facing huge fluctuations for a decade, and Maersk Drilling is no exception.

The company is slated for a listing this year and Maersk Drilling's future shareholders must therefore brace themselves for the impacts of external factors such as the oil price and global growth on the market, which could lead to huge market fluctuations and ultimately affect bottom lines.

The drilling industry has been squeezed for several years since an oil price decline and slowdown in oil companies' investment ventures in the 2014-2015 period left many drilling rigs without work.

The market won't suddenly go from crisis to triumph

Part of the pressure has been relieved in recent years, but companies in the industry are still far from a golden period. The market remains undercut and characterized by huge overcapacity, leading to significantly lower prices.

"At the present time it is necessary to arm oneself with patience. One cannot expect that this is an industry which will go from crisis to triumph in a few quarters. The industry needs to do a lot of tidying up," says Morten Imsgard, senior equity analyst at Sydbank.

"It is still tough for rig operators to fill up their order books enough, because there is too much capacity. Even though there are indications of increasing investor appetite, improvement and balance in the industry is a long way off," he continues.

Ricky S. Rasmussen, Nykredit analyst, says there is a long way to go before the industry hits a level close to the prosperity seen in the 00's.

"When companies order a rig, delivery happens a few years later. Funnily enough, everyone orders when demand is high, and that is why you get uncanny super cycles as a result. It's something investors need to be aware of if they're investing in this industry."

"This is an investment which has a much higher average risk as a result. However, Maersk has been very good at maintaining a reasonable order book relative to some of its Norwegian competitors, which are battling major problems. Some have been through restructuring, and Maersk has been more stringent here, and it also has a newer fleet," he says.

Sees fine interest in drilling shares

The analysts add that Maersk Drilling is one of the most well operated companies in a tough drilling market. The Danish company has a strong asset base and is has a strong financial grounding, and the Sydbank analyst also predicts that the company will head to the stock exchange with a relatively small debt share.

"So, it is sending a signal that this is a well-padded company. You are getting one company into a squeezed industry which has some buffer. If the market gets better, Maersk Drilling will be the first in line to land some attractive orders and significantly boost earnings. This is a very good company in a stalled industry."

"The investors could come on board a period which marks the bottom of a cycle, and it is clear that some investors believe that this could be attractive. If you believe that a better supply-demand balance lies ahead, Maersk Drilling could be a good company in the industry," he says.

The Nykredit analyst adds that Maersk Drilling could potentially mark a good bid for investors who hope to create greater diversity within their share portfolio.

"As diversification, I believe that this suits many. We don't have anything that reminds us of Denmark. Currently, you need to invest in Maersk to get a share of this market, but then you also get the transport business. I believe that it will be attractive enough and that there will be strong interest in the share," says Ricky S. Rasmussen.

Lower oil price

In the third quarter last year, Maersk increased the value of Maersk Drilling from USD 445 million and since written it up to USD 5 billion. Since then, the oil price has fallen significantly, meaning the book value has likely also declined.

"When the book value was upgraded not long ago, it took its departure point from increasing oil prices. Now we have seen a return and a market value of USD 4.2-4.5 billion is much more likely now," says Imsgard.

"Ultimately, the price is not so critical. The critical aspect is that they hit a price which the market currently agrees on. Shareholders are the same, and therefore values ideally would also be the same. In theory, this is a zero-sum game," he continues.

He refers to the fact that the listing will see current Maersk shareholders receiving Maersk Drilling shares.

English Edit: Lena Rutkowski

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