Offshore Update: Heating Up For The Second Half Of 2024

More Signs Of The Offshore Bull Cycle, Insider Activity & The Borr Dividend Machine Just Getting Started

Summary

• Sable Offshore: Lots of insider activity with a potential production restart fast approaching.

• Tidewater: The OSV king continues to roll, but we did get a wave of insider selling recently.

• Borr: The business continues to outperform the narrative around jackups, and the stock now yields 5.8%.

• Transocean: Insider buying, fundamentals improving, and the share price is flat over the last year.

• Valaris: I still think the warrants are still the most asymmetric bet in the sector.

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We finally got the last Q1 report from the offshore companies I own with Borr Drilling BORR 0.00%↑ reporting earnings and doubling their dividend. I think we have a lot of runway for the whole sector, but now is a good time for an update on each stock in the portfolio. Outside of the offshore space, it’s worth mentioning that ConocoPhilips COP 0.00%↑ is buying Marathon Oil MRO 0.00%↑ for $22.5B in an all-stock deal. I find the offshore sector more attractive than onshore, but I think the consolidation will continue moving forward.

Offshore Oil Summer?

I know I’m starting to get repetitive at this point, but I have a hard time finding opportunities with a risk/reward profile that is even in the same ballpark as the offshore sector. I’m not adding to the sector here unless we get good news from Sable, but I think a rising tide will lift all boats when it comes to offshore. Whether it’s Tidewater TDW 0.00%↑ with OSVs, Borr with jackups, Valaris VAL 0.00%↑ with a mix of jackups and deepwater, or Transocean RIG 0.00%↑, the deepwater pure play, I’m very optimistic that the market will start to realize that fair value for these assets is a lot higher. Let’s start with one of the most interesting special situations in the energy sector, Sable Offshore SOC 0.00%↑.

Sable Offshore: A Busy Week For Insiders

Sable is a binary outcome, but it’s a very interesting situation that looks like the catalyst is fast approaching. The COO sold 200,000 shares, while CEO Jim Flores has continued to add to his already large position. We also had one of the funds exercise 500,000 warrants ($11.50 strike price), so it’s been a busy week for insider activity. It’s up more than 40% in the last month, so I’m obviously regretting not buying more at least in the short term. At the same time, it’s hard for me to justify the risk/reward of a larger position until they get the green light from the California Fire Marshall to start production in my opinion. Once that happens, I will be buying a lot more shares until it’s a medium sized position. I’m sure that will be chasing the share price, but fair value is much higher if they start producing.

Tidewater: The OSV Machine

Tidewater reported blowout earnings in early May, sending the stock from the low-90s up above $110 before the recent pullback. I figured I would include a screenshot of the quarterly trend for Tidewater’s results below. It’s going to be real hard for me to sell any of my shares as long as the business continues to perform like it has, and as long as day rates look like they are going to continue to head higher. If I had to guess, we are bit further along in the OSV cycle versus jackups or deepwater, but I think we still have a long way to go from here.

Tidewater Quarterly Income Statement

There are a couple reasons for caution in the near term for anyone interested in buying Tidewater or adding to an existing position. The first (and probably most notable) is a wave of insider selling. This includes management and investment managers like Bob Robotti, but I can’t blame them for taking some chips off the table after the run the stock has had over the last couple years. The buybacks also slowed in Q1, as they only spent $3.5M for the quarter. I’m not a seller here cause I think we have years of runway left, but I’m curious to see how things develop for the business and the stock in the second half of 2024.

Borr Drilling: All Aboard The Dividend Train

What a difference a month makes. I said in my Year in Review post that Borr had the biggest disconnect between the share price and the fundamentals of the stocks that I own in the offshore oil services sector. Shares are up 18% since reporting earnings last week, and I think we still have a long runway ahead of us. The big piece of news was the doubling of the quarterly dividend to $0.10 per share. That puts the forward yield at 5.8% (with no increases in the next year), and I wouldn’t be surprised if we get more dividend hikes (and/or buybacks ramping up) by the end of 2025. I was hoping for buybacks during Q1, but I can’t complain about the dividend increase.