The global energy landscape is witnessing a seismic shift, with the growing ESG movement restricting investment into oil drilling, according to renowned investment author, John Mauldin. This, combined with a surge in demand, is driving up oil prices, particularly for offshore oil plays. The VanEck Oil Services ETF, for instance, has rocketed up 51% over the last 52 weeks, outpacing the S&P 500’s 15% gain. Meanwhile, Weatherford International, an oil services company, has seen a staggering 202% surge in its stock value over the same time frame.

However, this spike in oil stocks seems to be going largely unnoticed, as evidenced by a sparsely attended Barclays offshore oil conference. Rupert Mitchell, author of the Blind Squirrel Macro blog, is focusing on the underappreciated sector of oil rig and drill ship owners and operators, along with their support vessels and specialized service providers. These entities, which boast a combined market cap of $30 billion, are reaping the benefits of high utilization rates exceeding 90% and rising day rates, despite trading at an 80% discount to the value of their replacement cost.

The Rising Tide of Offshore Oil Plays

ESG, Supply, and Rising Prices

Famous investment author, John Mauldin, points out that the Environmental, Social, and Governance (ESG) movement is restricting the capital and locations available for drilling. This reduction in supply for a commodity with increasing demand, as Mauldin highlights, can only lead to rising prices. This has been particularly noticeable in offshore oil plays. For instance, the VanEck Oil Services ETF has surged by 51% over the last 52 weeks, significantly outperforming the S&P 500’s 15% gain.

Notable Performers

Several oil services companies have seen substantial growth over the same period. Weatherford International, for example, has seen a 202% surge in its stock. Other companies like Transocean and Tidewater have almost tripled their value over the last year. Despite this impressive performance, the offshore oil sector seems to be overlooked, as evidenced by the lack of attendance at a recent Barclays offshore oil conference.

The Focus Shifts to Rig Operators

Rupert Mitchell, author of the Blind Squirrel Macro blog, has shifted his focus to the owners and operators of oil rigs, drill ships, and their support vessels. His attention is on companies with a combined market capitalization of $30 billion, including Valaris Noble, Weatherford, Transocean, and Tidewater. These companies have recently emerged from bankruptcy with limited to no debt, and in the case of Transocean, hold a large number of high-end assets that position them well to capitalize on rising day rates.

High Utilization and Low Replacement Cost

Mitchell’s argument hinges on high utilization rates, now exceeding 90%, and climbing day rates – the daily cost for drilling. He notes that offshore companies are trading at an 80% discount to the value of their replacement cost, effectively preventing the construction of new equipment. Shipyards, previously burned by the sector, are now focusing on more promising sectors like liquefied natural gas carriers. As a result, Mitchell argues, companies with younger fleets are becoming price-makers.

Takeaways

This trend in offshore oil plays presents an intriguing opportunity for investors. The sector’s impressive growth, bolstered by increasing demand and limited supply, contrasts with the general lack of attention it receives. With high utilization rates and low replacement costs, companies like Transocean and Weatherford are well-positioned to continue this upward trend. As the focus shifts to rig operators and the ESG movement continues to limit drilling locations, the offshore oil sector may continue to offer attractive returns for savvy investors.