Drill Baby, Drill
It is rare to come up with 2 ideas in two months especially when I spent most of 2024 without any high conviction idea. But idea generation is not that straight forward a process. You get an idea when there comes an opportunity - usually a company with low price compared to its intrinsic value, a catalyst to realize that value and most importantly, the opportunity you understand.
My high conviction bet was back in January 2024, Occidental Petroleum ($OXY) and I spent close to 10 months wandering aimlessly, making small sized bets like Kaspi. Then in 2025 January, I found this. And now we are on to a second idea - Offshore Drillers. Unlike the previous picks so far, this is a basket approach (I will explain shortly why that is the case).
The thesis has been well laid out by Praetorian Capital and it would be hard for me to give you substantially incremental to what is laid out there. However, I do have a special surprise - An European microcap offshore driller that is trading at 17% dividend yield.
Few basic definitions before we get to the thesis
Day-rates
Most contracts in offshore drilling is based on day-rates which is essentially contract value divided by the number of days in the contract. Day rates and Utilization (% of days an asset is under contract) determine the revenue, profitability of offshore drillers.
Drill ships
These are literally ships that can go deep and drill the sea bed for oil. The benefit is drill ships can easily be moved to new places when contracts are up
Semisubmersible
They are slightly specialized marine vessel platforms and typically have better stability than drill ships.
Jackups
Jackup rigs are self-elevating units that consists of a buoyant hull fitted with a number of movable legs, capable of raising its hull over the surface of the sea. The buoyant hull enables transportation of the unit and all attached machinery to a desired location.
Summary
The idea came up from a twitter conversation on Sabre Offshore Oil Corp ($SOC) and then reading Praetorian Capital’s detailed summary. Offshore Drilling industry has been in a down cycle from 2014-2021, leading to bankruptcies of major offshore drillers (due to extended low oil prices, high debt, low oil capex). Since 2021, 3 offshore drillers have come out of the bankruptcy process with a cleaner balance sheet, legacy debt wiped away. The industry has also consolidated (4 big players controlling more than 50% of supply) and the contract day-rates have began to move up. I expect the contract day-rates to stay at these levels or get higher as the cost of building a new rig is prohibitive. To put it other way, day-rates have to be 80% higher than current levels for next 5 years for incentivizing new builds.
On public market side, there is little to no investor appetite for these companies due to ESG concerns (general negative sentiment towards oil and risk of oil spills), rise of renewables and the fingers burnt from bankruptcies. The capital for offshore drilling projects are starting to come back too.