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Ramifications of an ‘Obamatorium’ 

By Sam Fletcher

The “Obamatorium” ban of Gulf of Mexico drilling—just lifted last week—has joined “ObamaCare” as yet another catch phrase used by opponents to tie another potential economic disaster to US President Barack Obama’s administration, prompting analysts in the Houston office of Raymond James & Associates Inc. to advise investors to “play the [high specification] jack ups, fold the floaters” in the current “offshore driller shuffle.”

On Oct. 11, a day before the moratorium was lifted, Raymond James analysts reported, “The main reason for our near-term pessimism is that it appears the current offshore US deepwater moratorium is likely to morph into an ‘Obamatorium’ where the drilling moratorium is technically lifted but drilling does not rebound due to Obama administration-directed permitting delays” in even shallow water.

Moreover, they said, “Ongoing deliveries of (pre-meltdown ordered) rig newbuilds mean that offshore drilling capacity is likely to increase in an already oversupplied market.”

They concluded:

• The “Obamatorium” will depress US offshore activity greater and longer than many expect. “Everyone including US energy consumers lose,” they prophesized.

• Much like the US land rig market, there is an increasing bifurcation in the jack up arena, as operators continue to pay a premium for high-specification rigs.

• Shallow-water and low-end jack ups likely will suffer for several years.

• Ultradeepwater floater rates should stabilize in the near term but not improve substantially until 2013.

Floaters in doldrums

Raymond James analysts said, “Floaters are in the doldrums, as the Obamatorium could wreck havoc on the Gulf of Mexico floater market into late 2011 or early 2012. While the ultradeepwater market may maintain current day rates ($400,000/day), older deep- and midwater assets could feel pressure on rates and utilization.”

On the other hand, they said, “The high-spec jack up market is the only offshore drilling group with any near-term momentum as day rates continue to rise. Standard jack up dayrates are stable and could benefit from continued strength in the high-spec market.”

Against that backdrop, Raymond James analysts upgraded high-spec jack up drilling contractor Rowan Cos. Inc. to a “strong buy” rating from its previous “outperform” rating. The “hybrid jack up” firm, Ensco PLC, was raised to “outperform” rating from “market perform.” In other action, the analysts dropped the rating of “floater-heavy” Transocean Ltd. to “market perform” from its previous “outperform” rating. Noble Corp.’s rating was lowered to “outperform” from “strong buy.”

Raymond James analysts observed, “This has been a rough year for stocks of offshore drilling contractors because of fallout over the Macondo accident in the gulf. While the broader markets and oil service indexes are roughly flat year-to-date, the offshore drilling group is down, on average, over 15%.” They said, “The bottom line is that the timing and magnitude of the offshore drilling recovery will be more asset-specific than any cyclical offshore driller upswing in the past few decades. While valuations are attractive for those with long-term horizons, we think this offshore recovery will generally take longer than many think. That means offshore drilling investors should focus on international-driven jack ups, particularly higher-spec, for the short term, and leave the floaters to those with much longer-term horizons.”

Election issues

ObamaCare is the partisan health reform program passed by the Democratic Congress and signed into law by President Obama in March. However, it has proven unpopular with many voters, and virtually the only Democrat candidates now raising the issue in reelection campaigns are those who didn’t vote for it.

Obamatorium is not much of a political issue in the current midterm electioneering, although Louisiana Democrats strongly oppose it. But an extended delay in drilling new oil and gas resources in both the deep and shallow waters of the gulf on the pretense of safety issues will cause a lag in replacing offshore oil and gas reserves now being depleted. The resulting shortage of fuel resources likely will be obvious in 2 years when the economy may again be on the rise and Obama will be seeking reelection from voters angry over the high price of fuel because of Obamatorium.

Source: Oil & Gas Journal

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