As the fog around the world’s economic outlook thickens due to slowing global economic growth and inflationary pressures, the energy drilling industry has been pegged back by the impending end to its legacy of high-margin contracts.
Considering the industry’s bleak outlook, it could be wise to steer clear of fundamentally weak stocks Valaris Limited (VAL), Transocean Ltd. (RIG), and Diamond Offshore Drilling, Inc. (DO). Let’s dig deeper to find more.
The economy has been enduring turbulent times with the increasing possibility of a global recession. According to a report by the Conference Board, the probability of a U.S. recession remains elevated, with a near 99% pointing to a downturn within the next 12 months.
Adding to the pessimism, the International Monetary Fund (IMF) recently warned that the world economy is on the brink of a painful slowdown amid worries about the global banking system and concerns that rising interest rates could force banks to curtail lending. In its latest World Economic Outlook report, IMF slashed its growth forecast for 2023, lowering it to 2.8% from 2.9% in January.
Drilling operators have been experiencing the storms of rising costs and supply-chain tightness in the form of increased expenses related to maintenance and inventory. Moreover, the recent data from the Baker Hughes Rig Counts, which is an important measure of the drilling industry’s performance, revealed that the U.S. oil rigs fell to 588 last week, their lowest since June 2022, while gas rigs fell to 157.
Furthermore, although inflation declined from its summer highs last year, it remains far above the Fed desired levels. This indicates that the central bank will be persistent with its aggressive policy of raising rates to quell inflation, which could lead to a rough road for energy equities.
Given the weak fundamentals and bleak growth prospects of VAL, RIG, and DO, these stocks may find it hard to sail through the tides of rough waters. So, we think these stocks are best avoided.
Valaris Limited (VAL)
VAL is an international provider of offshore contract drilling services to the oil and gas industry. It owns an offshore drilling rig fleet, which includes drillships, dynamically positioned semi-submersible rigs, moored semi-submersible rigs, and jackup rigs.
On April 5, the company announced the pricing of a $700 million upsized private placement of 8.375% Senior Secured Second Lien Notes Due 2030 and entered into a $375 million revolving credit facility. This might increase the overall debt burden for VAL.
In terms of forward non-GAAP P/E, VAL is trading at 44.03x, 409.5% higher than the industry average of 8.64x. Also, its forward EV/EBITDA and EV/EBIT multiples of 23.18 and 44.35 are 333% and 440.8% higher compared to the industry averages of 5.35x and 8.20x, respectively.
In the fiscal fourth quarter that ended December 31, 2022, VAL’s total operating expenses increased 23.7% year-over-year to $401.10 million. Its attributable net income declined 12.3% year-over-year to $29.20 million, while its EPS fell 13.6% from the year-ago value to $0.38.
Street expects VAL’s EPS to decline 45.4% year-over-year to $1.50 in the fiscal year 2023 (ending December 2023). Its loss per share is expected to amount to $0.29 in the to-be-reported quarter that ended March 31, 2023.
VAL’s revenue has declined at 7.9% and 2.8% CAGRs over the past three and five years, respectively. Also, its total assets have decreased at a 44.7% CAGR over the past three years.
Over the past three months, the stock has declined 8.1% to close the last trading session at $65.99.
VAL’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Value and a D for Stability and Sentiment. Out of 15 stocks in the D-rated Energy - Drilling industry, it is ranked #12. Click here to see the additional ratings for VAL (Growth, Momentum, and Quality).
Transocean Ltd. (RIG)
RIG is a global provider of offshore contract drilling services for oil and gas wells. Its primary business is to contract its drilling rigs, related equipment, and work crews on a day rate basis to drill oil and gas wells.
In terms of forward EV/EBIT, RIG is trading at 44.54x, 443.2% higher than the industry average of 8.20x. The stock’s forward EV/EBITDA of 12.43x is 132.3% higher than the 5.35x industry average. Furthermore, the stock’s forward Price/Cash Flow of 12.26x is 202.5% higher than the 4.05x industry average.
For the fiscal fourth quarter that ended December 31, 2022, RIG’s total contract drilling revenues decreased 2.4% year-over-year to $606 million. The company’s adjusted net loss widened 182.5% from the year-ago value to $356 million, while its adjusted net loss per share came in at $0.49, widening 157.9% year-over-year. Also, its adjusted EBITDA stood at $140 million, down 44% from the prior-year value.
Analysts expect the company’s EPS to decline 36.7% year-over-year in the second quarter (ending June 2023) to a loss per share of $0.14 and remain negative in the fiscal year 2023. Over the past three years, RIG’s revenue and EBITDA decreased at CAGRs of 5.9% and 3.9%. The stock declined close to 2% intraday to close the last trading session at $6.55.
RIG’s POWR Ratings are consistent with its bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It has an F grade for Sentiment and a D for Growth, Value, Stability, and Quality. It is ranked last out of 15 stocks in the same industry. Click here to see RIG’s rating for Momentum.
Diamond Offshore Drilling, Inc. (DO)
DO provides contract drilling services to independent oil and gas companies and government-owned oil companies globally.
In terms of forward non-GAAP P/E, DO is trading at 151.23x, significantly higher than the industry average of 8.64x. Likewise, its forward EV/EBITDA and EV/EBIT multiples of 10.60 and 24.80 are 98.1% and 202.4% higher than the 5.35 and 8.20 industry averages, respectively.
During the fourth quarter that ended December 31, 2022, DO’s total revenues decreased marginally from the last quarter (ended September 30, 2022) to $223.26 million. Its operating loss widened 60.9% sequentially from the prior-quarter value to $12.19 million, while its adjusted EBITDA stood at $12.48 million, down 32.3% quarter-over-quarter.
Also, DO’s net loss came in at $52.44 million and $0.52 per share versus a net income of $5.51 million and $0.05 per share in the last quarter.
Analysts expect DO’s loss per share for the quarter that ended on March 31, 2023, to be $0.23. Its revenue has declined at CAGRs of 8.1% and 13% over the past three and five years, respectively. The stock has gained 3.6% intraday to close the last trading session at $12.49.
DO’s POWR Ratings reflect this weak outlook. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system. It has a D grade for Growth, Value, Stability, and Quality. Within the same industry, it is ranked #14.
Beyond what I’ve stated above, we have also given DO grades for Momentum and Sentiment. Get all DO ratings here.
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VAL shares were trading at $66.35 per share on Monday morning, up $0.36 (+0.55%). Year-to-date, VAL has declined -1.88%, versus a 8.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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