After more than two years of steady declines, the oil service cycle is finally starting to turn, according to a new report from analysts at Wells Fargo. That is good news for stocks like Transocean (RIG) , which was upgraded to Market Perform from Underperform by analysts at the firm.
"Despite the recent weakness in oil prices, we see tangible signs that the oil service cycle is starting to turn and, perhaps more importantly, early signs that 1) the U.S. recovery could be stronger than our initial expectations and 2) a recovery in international and offshore activity could be stronger than expected in 2017/2018," analyst Judson E. Bailey wrote.
In turn, the firm is raising its global capex expectations through 2018 as oil prices are expected to continue to climb. The oil rally has hit some snags in recent weeks as markets continue to worry about demand headwinds and rising inventory builds, but Wells Fargo raised its price expectations. The firm is now forecasting oil prices of $45 per barrel, $57 per barrel and $62 per barrel for 2016, 2017 and 2018, respectively, up from its previous forecast for $40, $50 and $60 over the next three years.
The firm is also increasing its offshore, international and Lower 48 rig counts.
"Despite modestly higher offshore rig count expectations, the day-rate environment has grown increasingly competitive in the last few months as contractors bid at or below cash break-even levels with recent indications that high-spec, ultra-deepwater (UDW) rigs have been bid in multiple areas between $150-175,000," Bailey warned. "Given this backdrop, we are lowering our assumption for UDW day rates to $175-205,000 (depending on the region) from $215-245,000 through 2017 and also lowering day rates for other classes of floating rigs by 10-20%."
In addition to the company's recent $1 billion-plus high-yield offering, the firm also expects Transocean to secure additional debt facilities that will be secured by four new-build drill ship contracts that value each rig at between $500 million and $600 million.
As Transocean and the wider offshore rig sector continue to recover, the stress level is certain to fall accordingly.