Deep Dive Into The Offshore Drilling Upcycle And How To Play It
By: Jon Costello
Note: For greater detail on individual companies and stocks, subscribers should reference my previous write-ups on offshore drillers, which can be found below.
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Introduction
As energy investors, we're always on the lookout for the best opportunities. However, finding bargains that offer outsized gains with low risk has grown more challenging.
Opportunities for big gains in E&Ps have dwindled in recent years. By and large, E&Ps have delineated their acreage, honed their cost structures, paid down debt, and are now distributing free cash flow to their shareholders. While E&P stocks frequently represent solid value propositions, particularly at today’s low oil prices, most lack multi-bagger potential unless commodity prices increase to very high levels.
Bargains are also difficult to find in oil and gas midstream. To be sure, the natural gas infrastructure buildout will continue. But going forward, the major players, such as Energy Transfer (ET), Enterprise Products Partners (EPD), and Oneok (OKE), will be the main beneficiaries. Opportunities to invest for big gains and low risk in smaller operators have all but disappeared as the sector has consolidated.
One segment of the energy sector currently holds the prospect for big gains with relatively low risk: offshore drillers. Investors looking to significantly outperform the energy sector and the market at large over the coming years should consider these names at their current prices.
What follows is a review of recent developments in the offshore drilling segment, its economics, and my favorite stocks for playing its long-term upcycle.
The Offshore Upcycle Takes a Breather
Recent weakness in offshore drilling stocks has created an outstanding entry point for long-term investors.
The segment’s weakness began in mid-2024 due to deepwater project postponements. A series of offshore projects planned by Petrobras (PBR), Equinor (EQNR), Shell (SHEL), and others were pushed back a few quarters from their initial startup dates in 2024 and 2025. The postponements were attributable to capital discipline exercised by large E&P operations, regulatory and political issues, and delays in the construction of floating production storage and offloading vessels associated with large deepwater projects.
At the same time deepwater projects were postponed, shallow-water market conditions also deteriorated, as Saudi Aramco and Pemex suspended contracts tied to jackup rigs, which specialize in shallow-water drilling.
The sudden onset of offshore market weakness caused rig utilization rates to decline across the board. The trend for deepwater drillship utilization can be seen in the chart below. Utilization reached a high of approximately 93% in early 2024 before undergoing a sustained reversal. Drillship utilization currently stands at around 88%.
Source: Seadrill March 2025 Investor Presentation. Red circle added by author.
Declining utilization rates weakened the demand for offshore rigs, which led to a decline in “dayrates,” the fees paid to offshore drilling contractors for the use of their rigs. Dayrates are the most important factor in offshore drilling profitability. From 2021 through 2023, they were on a trajectory to meet previous cyclical highs. However, weaker utilization led to an abrupt reversal in the upward trend.
The charts below plot the historical dayrates for deepwater drillship contracts. Drillships are the workhorses of deepwater drilling projects. The chart on the left shows the steady increase in drillship rates that occurred up to September 2024. This trend underpinned the market’s optimism with regard to future dayrates. The chart on the right plots dayrates just six months later. Note the leveling out of the uptrend that began later in 2024.
Source: Seadrill March 2025 Investor Presentation, Seadrill September 2024 Investor Presentation. Red lines added by author.
The deterioration in utilization and dayrates triggered a dramatic selloff among offshore drilling stocks. The next chart shows the stock price performance for the public deepwater drilling contractors—namely, Noble Corp. (NE), Valaris (VAL), and Seadrill (SDRL)—over the past three years. The recent selloff has taken the stocks down to multi-year lows.
Source: Yahoo! Finance, May 28, 2025.
The last time these stocks traded around their current levels, back in 2022, drillship dayrates were 25% lower than they are today. Their market valuations reflect the deep negativity that has taken hold among offshore drilling investors.
Offshore Drilling Activity Will Eventually Rebound
Offshore development and exploration can’t be postponed indefinitely. Large oil companies are producing massive volumes of their reserves, which must be replaced at a reasonable cost in order to maintain shareholder value. These companies must invest many billions annually to find and develop new prospects.