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Exxon and Petrobras bet on offshore drilling - Vladimir Zernov

Exxon Mobil together with Petrobras purchases blocks on Brazil's 14th bidding round. This is a major sign that investment starts to return in the offshore drilling space. Expect both companies to benefit from low dayrates of the offshore drilling industry. Drillers also stand to gain as new jobs will emerge.

By Vladimir Zernov

Petroleumworld 10 02 2017

The prolonged downturn in the offshore drilling space prompted many observers to say that the offshore drilling era was over. Many downside factors were noted, including low oil prices, which make offshore drilling projects uneconomic, competition from short-cycle shale projects, which get the most investment dollars, and the rise of electric vehicles, which are supposed to kill the oil industry in the long term. I have been - and remain - quite a skeptic on the "electric revolution" for many reasons beyond the scope of this article, but have always agreed with the first two factors - the development of the "lower for longer" scenario and the destructive force of shale that delivered a massive blow to investments in the offshore drilling space for the last several years.

However, it looks like offshore drilling investment is slowly returning back to the scene. Exxon Mobil (NYSE: XOM ) won six blocks in the Campos basin together with Petrobras (NYSE: PBR ). The company also bought two blocks in the Campos on its own and won two blocks in the Sergipe-Alagoas basin.

Campos basin is situated not far from Rio de Janeiro:

Sergipe-Alagoas basin is situated in the east of Brazil:

If you are interested in more details about Brazil's 14 th bidding round, you can access it here .

This win at the auction is a major move for Exxon Mobil which has been mostly unloved by investors this year. Looking at its major peers - Chevron (NYSE: CVX ), BP (NYSE: BP ), Total (NYSE: TOT ), Shell (NYSE: RDS.A ) (NYSE: RDS.B ) - all have outperformed Exxon Mobil this year. Plenty of various (and sometimes mutually exclusive) reasons were given to explain Exxon's underperformance by market observers, but I believe that market is just too hard on Exxon and I see a potential for a catch-up play here.

As for Petrobras, the company has recently been able to refinance part of its debt although the debt level remains very elevated. Yet, the refinancing shows that Petrobras is back into business and may invest for the future.

Together, Exxon Mobil's and Petrobras' purchases look great for the offshore drilling industry as Brazil should be the industry's largest market. Even more importantly, the purchase will likely be followed with exploration jobs - the main source of demand for the industry in normal times.

So, which offshore drillers are poised to benefit from this development? In my opinion, drillers with existing presence in Brazil have the best chances. Ensco (NYSE: ESV ), Diamond Offshore Drilling (NYSE: DO ), Transocean (NYSE: RIG ), Ocean Rig (NASDAQ: ORIG ) and Seadrill (NYSE: SDRL ) have their rigs working in Brazil. It will be very interesting to see if Ocean Rig can benefit from this development as it currently has Ocean Rig Mykonos and Ocean Rig Corcovado working for Petrobras. For Ocean Rig, such a development will be game-changing, although current shareholders won't have much of an upside after they have been almost annihilated in restructuring.

I expect that Exxon Mobil and Petrobras will begin hiring drillers for new jobs soon. Now is the perfect time to take advantage of the low rates for exploration work. If this will in fact be the case, the offshore drilling industry will receive a new source of demand and certain drillers will benefit directly. My bet here is that drillers with larger fleet, like Ensco, Transocean and Seadrill, will get the work, although I would not rule out a surprise from Ocean Rig.

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