The global shift toward renewable energy sources has picked up pace in recent years. Valid concerns about climate change and global warming have compelled policymakers and corporations to reduce their carbon footprint and dependence on petroleum as a source of energy.
However, oil (CLV24) and natural gas (NGV24) continue to dominate as key global energy sources, despite associated geopolitical tensions and adverse effects on the climate. Notably, research from Stanford University indicates that oil is the most-used energy resource worldwide, and provides more than 90% of global transportation energy. And while McKinsey forecasts that oil demand will decline by up to 50% by 2050, the firm still sees demand for oil remaining strong at least through 2030.
This sentiment is also shared by Charles Lemonides, founder and chief investment officer of ValueWorks, a New York-based hedge fund with AUM of about $330 million. Lemonides recently told Marketwatch he's “investing in energy because you cannot get to zero overnight,” and called out the attractive valuations among three offshore energy stocks in particular. All three picks are in the small- to mid-cap range, with consensus “Strong Buy” ratings from analysts and plenty of room for growth. Here's a closer look.
#1. Valaris
Based out of London, Valaris (VAL) is one of the world's largest offshore drilling companies, providing offshore drilling services to the oil and gas industry. Its fleet of drilling rigs, including jack-up rigs, semisubmersibles, and drillships, are used to explore and develop offshore oil and gas fields. The company operates in various regions around the world, catering to the needs of major energy companies. Its market cap is currently at $4.35 billion.
VAL stock is down 11.8% on a YTD basis. The stock is also currently trading at a price/earnings (P/E) ratio of 8.2, which suggests that VAL is trading at a discount right now.
VAL's strong showing in Q2 provided support to its share price, as both revenue and earnings surpassed estimates. The company's revenues of $610 million in the quarter represented growth of 47% from the previous year. In a positive development, all segments, including Floaters and Jackups, delivered growth in revenues when compared to the prior year.
Valaris reported EPS of $2.03, which compared favorably to a loss of $0.39 per share reported in the prior year. Further, the EPS figure comfortably outpaced the consensus estimate of $0.71. Over the past five quarters, the company's EPS has topped expectations four times.
Cash flow from operating activities also turned positive in the quarter, at $11.5 million, compared to an outflow of $29.1 million in the previous year.
VAL's offshore drilling rig fleet includes advanced drillships, positioned and moored semisubmersible rigs, and versatile jack-up rigs. This enables VAL to operate in various markets worldwide.
The company has a $4.3 billion order book, which recently received a boost from a multi-year contract award for the drillship Valaris DS-17 offshore Brazil. Additionally, Valaris expects cash flow to improve in the second half of the year due to higher day rates and lower spending on reactivations and contract preparations.
All 7 analysts covering the stock have unanimously deemed VAL a “Strong Buy.” The mean target price is $95.34, which denotes a substantial upside potential of about 57.7% from current levels.
#2. Noble Corp
Founded in 1921, Noble Corp (NE) has evolved over the years to become a leading player in the offshore drilling industry. The company primarily provides offshore drilling services to the oil and gas industry, supporting exploration and production activities in various regions worldwide. Noble Corp. has a track record of delivering safe and efficient drilling operations, contributing to the development of offshore energy resources. The company's market cap currently stands at $5.36 billion.
NE stock is down 21.3% on a YTD basis, and it also offers a dividend yield of 5.32%. At a P/E of 8.1, the stock looks reasonably priced relative to its energy peers.
In Q2 2024, Noble reported revenues of $693 million, up from $639 million in the prior year, surpassing the consensus estimate by about $61 million. EPS surged by 89.5% over the same period to $0.72, coming in way ahead of the Street's expectations. Notably, the company ended the quarter with a cash balance of $162.85 million, much lower than its long-term debt levels of about $622 million.
Improvements in key metrics such as average rig utilization (73% in Q2 2024 vs. 70% in Q2 2023) and average day rates ($310,962 in Q2 2024 vs. $275,066 in Q2 2023) reflected operational efficiencies on the part of the company. Currently, Noble's fleet comprises 32 offshore rigs, including drillships, submersibles, and jack-ups, with a $4.2 billion order backlog. A significant win in the drillship segment was Noble's ability to exercise 5 additional well options with Murphy Oil (MUR) in the Gulf of Mexico, slated to begin in February 2025.
In Q2, the company secured key contracts, including a medium-term contract for Innovator and short-term contracts for Regina Allen, Resilient, and Resolve. These substantial orders for its drillships and drilling rigs add to the company's revenue visibility in both the short and long term.
Lastly, Noble's acquisition of Diamond Offshore Drilling (DO) is also expected to be a positive, as the combined entity will own and operate a fleet of 41 rigs and have an order backlog of about $6.5 billion.
All in all, analysts remain bullish about Noble stock. Out of 8 analysts covering the stock, 7 have a “Strong Buy” rating and 1 has a “Hold” rating, with the mean target price of $57.25 implying expected upside potential of about 51% from current levels.
#3. Tidewater
We conclude our list with Tidewater (TDW), a leading provider of marine transportation and support services to the global offshore energy industry. Founded in 1957, Tidewater has a global footprint with operations in various regions, including the Americas, Europe, Africa, and the Asia-Pacific. The company's fleet consists of a diverse range of vessels, such as offshore supply vessels (OSVs), anchor handling tug supply vessels (AHTSVs), and platform supply vessels (PSVs). Its market cap is currently $4.67 billion.
TDW stock is up 22.5% on a YTD basis, and is valued at a very reasonable 11.6x earnings.
Like its peers above, Tidewater's showing in Q2 was impressive, as the company beat estimates on both revenue and earnings. Revenues increased by 57.8% from the previous year to $339.23 million, with core vessel revenues rising 60.2% on a YoY basis. At the same time, EPS more than doubled to $0.94 from $0.43 in the prior year.
For the first six months of 2024, the company's net cash flow from operating activities was at $133.41 million, up considerably from $22.54 million in the year-ago period. Overall, the company closed the quarter with a cash balance of $315.9 million, up from $274.4 million at the start of the year, while long-term debt fell to $608 million from $631.4 million.
Key operational metrics also improved during the quarter. While the average number of vessels increased to 217 from 187 in the previous year, total fleet utilization improved to 80.5% from 76.9%. Also, average vessel day rates rose to $21,130 from $16,042 in the year-ago period.
Tidewater's is well-positioned to benefit from rising oil demand. It is the largest global OSV operator in the world, with more than 200 ships across a few significant categories, and a customer base featuring giants of the industry like Exxon Mobil (XOM), Chevron (CVX), Shell (SHEL), Equinor (EQNR), Eni (E), BP (BP), and more. These ships are relatively small but mighty, featuring powerful engines, work capacity, and even towing capabilities. They carry vital people and supplies like fuel, cement, and heavy machinery to and from offshore operations.
Also, Tidewater's fleet size has increased by approximately 80% over the past two years due to the acquisitions of Swire Pacific Offshore and Solstad Offshore. These acquisitions have expanded the company's vessel portfolio to include larger, more modern, and in-demand ships.
All five analysts in coverage have unanimously deemed the stock a “Strong Buy,” with a mean target price of $105.20, which suggests an upside potential of about 19.1% from current levels.
