Day Rates Don't Bode Well for Oil Service

In a declining day-rate environment, drilling stocks usually find a bottom when they reach a multiple of the replacement cost of their assets. TPH Energy says that the historical multiple is about 50%. The average replacement cost for companies in the group reached the 50% mark last fall, but the prices for oil rigs and for rig components such as steel have fallen sharply since then. Until the price of steel bottoms, drilling and rig stocks will have trouble finding a floor to stage a long-term rebound.

Last Tuesday, TPH Energy slashed its 2009 and 2010 earnings estimates for seven offshore-drilling companies, including Transocean, Noble, Pride International(PDE Quote), Diamond Offshore and Hercules Offshore(HERO Quote). Companies that have little debt and plenty of cash reserves are best positioned to navigate safely through the trouble the group faces. Transocean and Pride International take the top spots while Hercules Offshore trails the pack, according to the TPH Research Note.