The US oil and gas industry is off to a bad start to the new year, and market sentiment is as pessimistic as a year ago. Standard Chartered commodity analysts report that demand pessimism once again dominates, and traders are concerned that oil demand in the US and Europe will weaken. Some people on Wall Street are also pessimistic. Analysts warn that the industry is facing a severe risk-reward scenario in the short term, and that the risk of a mild recession is increasing.

Despite pessimistic market sentiment, investors are still betting heavily on one segment of the market: offshore oil and gas.

According to data for the full year of 2023 released by Clarksons Research (Clarksons Research), a world-class shipping and offshore research and consulting company, the offshore oil and gas industry is in good overall health and has achieved strong growth in all areas. The global offshore oil and gas market showed a significant growth trend in 2023, with the Clarksons Offshore Index (Clarksons Offshore Index), which is dedicated to tracking the number of rigs and the daily rent of offshore support vessels (OSV) and subsea facilities, rose 27% to a multi-year high of 106 points. Offshore support vessels are vessels specially designed to provide logistics services for offshore platforms and subsea facilities.

Even better for bulls, the survey reports expect the Clarkson Offshore Index to reach a record high in 2024. The performance of drilling platforms, offshore support vessels, and offshore oil and gas extraction markets is particularly strong. Currently, oil and gas vessel rates in most industries and regions have surpassed 2014 levels. The Middle East, Brazil, and West Africa regions are particularly active.

The Clarkson report shows that contracts for high-end jack-up rigs with daily rents of more than $160,000 are increasingly common. Meanwhile, in the fourth quarter of 2023, the daily rate for “cutting-edge” floating rigs has already surpassed the $500,000 mark. Demand for offshore support vessels continued to grow, with the number of active vessels reaching 2,452 by the end of 2023, an increase of 26% over 2020. The utilization rate of offshore support vessels reached 73%, with supply vessels (PSVs) being used as high as 78% in the fourth quarter. Clarkson's offshore support ship rate index climbed 30% at the end of 2023 to a 15-year high of 180 points.

In 2023, offshore crude oil production reached 25.5 million barrels per day (27% of total global oil production), up 3.0% year on year; while offshore gas production was 129 billion cubic feet per day (accounting for 32% of global gas supply), up 1.9% year over year.

Meanwhile, investment interest in the global offshore oil and gas industry is still high. The offshore oil and gas capital expenditure of 116 billion US dollars has entered the final investment decision stage, which is 49% higher than the average of the past ten years. Clarkson predicts that global offshore oil and gas capital expenditure will reach 125 billion US dollars this year.

Given these data, it's no surprise that stocks of offshore oil and gas drillers and producers were able to reverse a seven-year downward trend and outperform other oil and gas subsectors.

Over the past 12 months, the stock price performance of companies specializing in deep-water drilling (RIG.N) and Diamond Undersea Drilling (DO.N), Dechnib (FTI.N), Seadrill (SDRL.N), Noble (NE.N), and International Offshore Engineering (OII.N) all showed an upward trend. Compared with the energy industry benchmark, Energy Select Industry SPDR Fund (XLE), which is close to -10% return, they have performed even better.

Among the leading deepwater operators, only Valaris (VAL.N) had a return of -6.1% over the past period, and its share price performance was poor. However, for the company, a turning point is expected in the future: in their respective earnings calls, Valaris and Diamond Undersea Drilling both reported that the global offshore drilling market is seeing rising daily rates, extended contract terms, and upstream customers trying to lock down drilling platforms several years ahead of schedule.

“For most offshore projects, favorable commodity prices and attractive break-even points provide customers with confidence to invest in long-term offshore projects,” said Anton Dibowitz, president and CEO of Valaris in the earnings conference call. Valaris said it expects 25-30 upcoming contract opportunities for its deep-water floating drilling platform, and the contract period is expected to exceed one year.

There is a notable trend in the current offshore drilling boom: deep and ultra-deep water drilling activities have increased dramatically. Last year, CNPC launched an ultra-deep water oil and gas exploration and drilling program with the goal of drilling a 11,000-meter-deep test well within easy reach of Qatar's world record. This record was set by Qatar drilling a 12,289 meter deep oil well in the Al Shaheen oil field in 2008.

Last year, Norway's Aker BP (BP.N) achieved a major breakthrough in ultra-deep water exploration in Norwegian waters, reaching a drilling depth of 8,168 meters, which is the deepest exploration well drilled in Norwegian waters to date.

Wood Mackenzie predicts that by 2030, deep-water oil and gas production will grow 60% and contribute 8% to total upstream production. Ultra-deep water production is expected to continue to grow at a rapid rate, accounting for half of all deep water production by 2030.