2 Oil Stocks to Watch as Energy Demand Increases
Stock Analysis & Ideas

2 Oil Stocks to Watch as Energy Demand Increases

Story Highlights

Offshore oil extraction is gaining steam quickly amid a supply deficit and high demand. Valaris and Noble are two oil rig contractors whose drillers might turn into cash cows soon.

The treasure hunt for liquid gold has begun after years of stagnancy. Burgeoning energy demand is driving offshore oil rigs to the waters again. Also, an increasing number of digging projects are getting sanctioned, thanks to supply snags due to the Russia-Ukraine war and high crude prices. As this development gains momentum, Valaris (NYSE:VAL) and Noble Corporation (NYSE:NE) stand to be two of the biggest beneficiaries.

The Offshore Oil Hunt Takes Off

Citing Westwood Global Energy Group, The Wall Street Journal recently reported that around 90% of idle oil rigs sitting in shipyards until December 2022 are either working or are under contract to start work. This is a significant bump-up from five years ago when only 63% were working.

Environmental concerns kept oil rigs away from the ocean mostly in the last eight years or so after the previous offshore boom went bust in 2014. That year, oil prices plummeted due to oversupply from U.S. shale oil producers and OPEC’s refusal to reduce output. This pushed drill owners either to bankruptcy or major debt restructuring.

Now that the tables have turned and oil is scarce, expensive, and necessary, a golden opportunity has presented itself for offshore drilling contractors like Valaris and Noble.

Valaris and Noble: A Huge Market Opportunity Exists

Interestingly, the two companies have a lucrative niche market to serve. They own and staff the massive drillships that are highly valued for their ability to perform deep-water digging.

The WSJ noted that drillships are now coming with a tag of $400,000 a day, up from around $300,000 early last year. According to analysts, rates may increase to $500,000 per day in 2024. This opens a big opportunity for the two stocks to mint money.

On the flip side, rig contractors like Valaris and Noble are also restricting the reactivation of their drillships despite the huge demand. The process is both time and money-consuming. However, oil extractors should be willing to pay for the reactivation as part of the lease, giving contractors the opportunity to refit their rigs.

In July 2022, Valaris received a $327 million contract from Norwegian oil company Equinor ASA (NYSE:EQNR) to reactivate and lease out its drillship Valaris DS-17 for 540 days in a deep-water field off the coast of Brazil. About $86 million of this price was paid upfront to reactivate the driller.

What Do Valaris and Noble’s Futures Look Like?

On the negative side, environmental activists, countries, and companies all over the world are pushing hard to come up with eco-friendly alternatives to fuel-dependent operations. This brings uncertainty to the future of offshore oil drilling.

However, for the world to become fuel-independent, there is still a lot to achieve. Offshore drilling is just picking up again and should be good to go for the next few years, at least.

Last week, Benchmark Co. analyst Kurt Hallead initiated coverage of both Valaris and Noble, with a Buy rating on each. The analyst believes that both companies are in a favorable position to gain from increased Exploration and Production (E&P) spending on offshore drilling projects in the next three to five years.

Both Valaris and Noble have a Moderate Buy consensus rating on Wall Street based on the one Buy rating assigned to each in the past three months.

VAL stock’s price target stands at $95, representing upside potential of 27.45%. The stock has risen 86% in the past 12 months.

Additionally, NE stock’s price target is $50, indicating that the stock has 25.2% upside potential.

The Bottom Line: A Lucrative Investment Opportunity

Valaris and Noble have dealt with strong blows after 2014, reemerging with significantly lower debt levels. Also, many players left the market during difficult times, leaving the fittest companies like Valaris and Noble to survive. This means lower competition in this lucrative market, giving these companies higher pricing power against oil producers interested in leasing their coveted drillers.

These factors make VAL and NE two compelling oil stocks to consider buying.

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