Morgan Stanley Is Bullish on the Offshore Drilling Market: Tightening Supply-Demand Dynamics Drive Dayrate Hikes, with SLB and HAL as Top Picks

Overview

Morgan Stanley’s offshore drilling industry report highlights that the market is at the early stage of a multi-year upcycle, driven by sustained demand growth and disciplined supply, tightening fundamentals. Utilization of offshore rigs is projected to reach the upper-middle 80% range by 2028, granting drillers strong pricing power and pushing high-spec dayrates toward 2023 peaks within 1–2 years.

Core views

Demand: Globally, offshore rig demand is expected to increase ~12% (17% for deepwater, 10% for shallow water) by 2030, with related capital expenditures rising ~11%. This growth is primarily driven by strong activity in Africa, Latin America (excluding Brazil), and the Asia-Pacific region. Deepwater tender activity in 2025 has reached its highest level in nearly 15 years, with front-loaded and extended contracts, signaling market tightening. Supply: Supply discipline contrasts with steady demand growth. The report assumes no cold-stacked rig activation or newbuild deliveries from 2027–2030. Additionally, due to prior widespread dismantling, rig retirements remain low. High-spec cold-stacked rigs are highly concentrated among a few listed drillers, reducing the risk of supply surprises. Pricing Outlook: The demand-supply mismatch translates directly into pricing power. The report projects leading dayrates for 6G+ drillships and semi-submersibles to rise ~20% by 2028, reaching ~$525,000/day and ~$475,000/day, respectively. High-spec jackups’ dayrates are projected to increase 10–15% by 2030 to ~$175,000/day. Investment Theme: The firm prefers globally diversified integrated service companies. SLB (~25% offshore revenue exposure) and HAL (~15% offshore revenue exposure) are top picks. For pure-offshore driller RIG, despite a better risk-return profile (target price implies ~13% upside vs. ~7% sector average), the report maintains Equal Weight due to valuation exceeding historical medians and earnings expectations aligning with consensus. NOV, with >40% revenue exposure to offshore capex, also retains Equal Weight.

Analysis framework

The firm builds its analysis on classic supply-demand fundamentals. It first forecasts future rig demand by deconstructing capital expenditure plans across regions (e.g., Africa, Latin America, Asia-Pacific) and well types (deepwater, shallow water). Then, it estimates effective supply using fleet status, cold-stack concentration, and retirements. Comparing demand and supply yields utilization trends and key inflection points (e.g., >80% utilization). This informs dayrate projections based on historical pricing patterns. For valuation, integrated service firms are valued using a blended approach (EV/EBITDA + DCF), while pure-play drillers are assessed using an Asset Value framework based on fleet replacement and reactivation costs.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply-demand framework

  Supply-Demand Framework Analysis

  The report forecasts offshore rig demand by region and offsets supply by excluding cold-stacked and retired rigs, establishing a framework to identify inflection points in cyclicality—central to cycle-stage assessment.

• Valuation Method

  EV / Asset Value Valuation

  For capital-intensive pure-play offshore drillers, the report estimates asset value as the sum of fleet replacement and reactivation costs, then compares enterprise value (EV) to asset value to determine premium or discount relative to underlying asset worth.

• Valuation MethodDCF (Discounted Cash Flow)

  DCF and EV/EBITDA Hybrid Valuation

  For integrated service firms, the report weights 50% EV/EBITDA target multiple and 50% DCF, balancing relative and intrinsic valuation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Schlumberger NV (SLB)

  Beneficiary: Global diversified service giant; ~25% offshore revenue exposure, poised to fully capture the offshore upcycle.

  Strengths

  Geographically diversified业务; strong risk resilience; Overweight (OW) with $57 target price.

  Comparison

  Higher offshore exposure than HAL; top pick alongside HAL.

• Halliburton Co (HAL)

  Beneficiary: ~15% offshore revenue exposure; top pick of the report.

  Strengths

  Global footprint; non-core segments support growth; Overweight (OW), $42 target price.

  Comparison

  Peer to SLB as top integrated pick; lower offshore exposure but more attractive valuation.

  Risks

  Unexpected slowdown in North American activity; international market share erosion.

• Transocean Ltd. (RIG)

  Beneficiary: Pure-play offshore driller, directly benefits from dayrate inflation.

  Strengths

  Relatively attractive risk-reward (13% target upside vs. ~7% sector average).

  Weaknesses

  Current EV/AV (1.24x) exceeds historical median, and earnings expectations align with consensus—limited upside surprise.

  Comparison

  Lowest valuation bar among pure-drillers, but基本面 elasticity depends on no-supply assumption.

  Risks

  Market share erosion; difficulties marketing legacy assets; financial leverage and Debt refinancing risk.

• National Oilwell Varco Inc. (NOV)

  Beneficiary: Highest offshore capex exposure (>40% revenue); benefits from offshore equipment demand.

  Strengths

  Leading offshore OEM; direct beneficiary if offshore OEM spending rises.

  Weaknesses

  No cold-stack restart/newbuild assumptions limit equipment sales upside.

  Comparison

  Higher offshore exposure than SLB/HAL, but stock performance may track sector more closely.

  Risks

  Oilers’ activity slowdown; working capital improvement below expectation; pricing pressure.

Key data

• Offshore Rig Demand Growth by 2030+12%Deepwater (DW): +17%; Shallow Water (SW): +10%.
• Added Supply Assumption (2027–2030)0No cold-stack restarts or newbuild deliveries.
• 2028 Forecasted Marketing UtilizationHigh 80% rangeHighest level since early 2010s.
• 2028 Forecasted 6G+ Drillship Dayrate~$525,000/day~20% increase vs. 2025.
• 2028 Forecasted 6G+ Semi-Sub Dayrate~$475,000/day~20% increase vs. 2025.

Impact & implications

The sustained tightening in offshore drilling fundamentals supports resilience in earnings and cash flow generation across a wide range of commodity price scenarios. However, pure-play drillers’ valuations have already repriced significantly in the past year, reflecting much of the growth outlook. Thus, during this early upcycle phase, allocating to global integrated service companies—which benefit from offshore activity while also having non-core businesses (e.g., digital, renewables) as buffers—is likely a more balanced strategy.

Risks

• Slower-than-expected rig activity growth in North America and international markets.
• Commodity price and macro cyclical volatility.
• Aggressive bidding by competitors dampening dayrate momentum.
• Pure-play drillers face specific risks: customer contract cancellations, high leverage, and debt refinancing challenges.

What to watch

• Changes in tender volume and contract duration for deepwater and shallow-water rigs.
• Activation rates of high-spec cold-stacked rigs and pace of newbuild deliveries.
• Actual offshore capex execution in Africa, Latin America (ex-Brazil), and Asia-Pacific.
• Geopolitical impact of Middle East tensions on shallow-water global demand.