• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Energy Stocks' Misery Could Intensify in 2016

For offshore drillers in particular, next year unbelievably could make 2015 look tame.
By DANIEL DICKER Dec 31, 2015 | 10:00 AM EST
Stocks quotes in this article: SDRL, RIG, NE, RDS.A, EOG

Is it over yet? The year 2015 certainly will go down as the worst year for energy stocks since 2008 -- that is, unless 2016 beats it for misery. Looking at certain sub-sectors, such as offshore drilling, 2016 unbelievably could make 2015 look tame.

We always knew that the bust cycle in oil prices was going to bring a lot of bad times for energy stocks, but no one imagined such carnage, even among the strongest names. I have been focusing on what I have called "the survivors" and am trying to find value in the shares of names such as EOG Resources (EOG), Cimarex (XEC) and Hess (HES). With offshore drillers, I've imagined even more awful times ahead, but took a speculative shot with Seadrill (SDRL) as I look down the road two years at the inevitable rebound in deepwater drilling.

However, the resilience of many of the unconventional drillers unexpectedly has extended the timeline in this oil bust cycle, catching me by surprise. We're operating inside this insane Catch-22: Oil prices can't get constructive until U.S. and other non-OPEC producers start to trim their outputs, yet oil companies continue to use efficiency gains and top-line spending cuts to stay in the game and maintain production. Oil prices stay low and drift lower. Consequently, 2016 will not be happy, at least for the first few quarters.

It gets worse: Oil companies have pushed their debt deftly down the curve, with only a tiny number of high-yielding issues coming due and requiring refinancing this coming year, thus promising an even more extended period of financial life support. We've seen the wild outcome of a few of the early bankruptcies in U.S. independents: Both Quicksilver Resources and Magnum Hunter have seen their common shares go to zero and have been forced to declare Chapter 11, but also have been ordered to continue operations pending break-up or other restructuring.

Even bankruptcy, it seems, can't slow U.S. production much.

With spending cut to the bone, core wells being run dry and few wells being drilled to take their place, the "Red Queen" of shale production (running as fast as you can to stay in the same place)  most certainly will hit a very firm wall, and it will hit it sometime in 2016, of that I'm sure.

But that initial, massive drop in production from unconventional shale may not come in time to save offshore players, including possibly Seadrill. We've seen this week, for example, the cancellation by Shell (RDS.A) of the remaining time of Transocean's (RIG) Polar Pioneer contract. There was little surprise in this move, as the first exploratory Arctic well came up disappointedly empty and Shell already had withstood massive environmental pushback in the Arctic. With several other timing missteps from Shell in regards to the oil and gas market (think BG Group merger), it's no surprise that Polar Pioneer was given back. 

And while Transocean will be made whole for the contract time, it does go to a point about offshore in general: Almost all of the time options on current deepwater rig contracts are being refused by the exploration-and-production companies. More and more rigs are going idle and remain uncontracted further into the future.

As the timeline of destruction gets longer, so do the chances of full-scale default in the deepwater sector. While I had been hoping for a resurgence of offshore contracts in late 2017, it now is possible that the cycle won't find a turnaround until perhaps 2019 or 2020.

Wow! That makes the risk of holding Transocean, Noble (NE) or my beloved Seadrill positively depressing.

At current prices, I cannot recommend a sale of Seadrill -- it was always a speculative play that I budgeted for possibly going to zero, and I'm willing to let that play out. And I'm definitely not looking for any double-up or averaging of basis prices, either.  Indeed, it seems certain that both RIG and Noble will see single-digit prices in 2016 and Seadrill will sink below $3, if not flirt with the same Chapter 11 fate of Quicksilver and Magnum Hunter.

And in that, if it's any consolation, they certainly won't be alone in the coming year.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Daniel Dicker was long SDRL.

TAGS: Investing | U.S. Equity | Energy |

More from Energy

Welcome to Second Semester on Wall Street, Here's How to Make the Grade

Jim Collins
Jul 1, 2022 4:36 PM EDT

Think you can own big tech? You might just get an 'F' for that. Here's what will get you on the other side of this year.

The Market, It's Such a Gas!

Helene Meisler
Jul 1, 2022 6:00 AM EDT

Commodities like gas came down and people finally noticed. Let's check on that diesel, 30-year bonds and more.

Want to Save Your Retirement Fund? Tune Out the Talking Heads

Jim Collins
Jun 30, 2022 3:14 PM EDT

The first half of this year has been ugly. But we could have seen what would happen to Netflix, Tesla and Meta...

OPEC+ Opens the Spigot, but Are We Just Repeating Mistakes of 2008?

Maleeha Bengali
Jun 30, 2022 12:26 PM EDT

As we see this increase in oil production get rubberstamped, we must remember that demand never moves in a straight line.

Commodity Bull Runs Have Proven Unsustainable; Can This Time Be Different?

Carley Garner
Jun 30, 2022 12:00 PM EDT

It's possible, but unlikely, as we've yet to see the commodity complex hold gains forged in a bull market.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 09:49 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Stop Wishing, Hoping, and Praying and Take Control...
  • 07:59 PM EDT PAUL PRICE

    Very Good Quarterly Numbers From Bassett Furniture (BSET)

    Bassett Furniture blew right through analysts es...
  • 04:41 PM EDT PAUL PRICE

    First-Half Results - Putrid; Second Half Results - Likely to Be Much Better

    It's great that we're done with June. 2022 mark...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login