Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This report is bullish on offshore drilling companies. The author thinks the market overlooks physical assets like drilling rigs, which are now scarce because many were scrapped and new ones are expensive to build. He highlights three stocks: Transocean (most likely to focus on profit and cash flow despite high debt), Odfjell Drilling (improving finances, may return cash to shareholders), and Shelf Drilling (survived without bankruptcy). The sector trades at low valuations, and the author sees upside.
One-sentence summary: The author is [bullish] on the offshore drilling sector, believing that multiple supply-side constraints will drive day rate increases and excess returns.
The report argues that the low-interest-rate environment of the past decade fueled excessive market enthusiasm for asset-light business models while neglecting the value of tangible assets, creating opportunities for contrarian investors. The author cites Anthony Deden, emphasizing that "scarcity is the most important law of economics," and notes that the market's infatuation with "capital-less capitalism" is an oxymoron. Hosking Partners has capitalized on this opportunity by building positions in the "tangible world" sector, with the offshore drilling segment (approximately 2% of the portfolio) poised to deliver significant profits and free cash flow due to constrained supply and rising scarcity value. The margin of safety in this segment stems from high barriers to entry driven by its asset-intensive operations.
NGram analysis shows that the term "intangible asset" has surged in usage since the 1990s, while terms like "book value" from the tangible world have declined. This "either-or" linguistic phenomenon incorrectly portrays the interdependence of the two. The author points out that without data centers, there is no cloud storage; without logistics capabilities, no e-commerce; without semiconductor fabs, no AI. Citing Michael Mauboussin, intangible assets are "typically low-cost to produce and easy to share," but the author emphasizes that any analysis failing to accurately identify and reasonably value the interdependence of tangible and intangible assets risks being idealistic or superficial.
Mauboussin acknowledges that intangible assets face the risk of obsolescence due to replacement by new technologies—"once an operating system is replaced, the old system has little value." In contrast, the physical scale, complexity, and durability of tangible assets directly determine their entry barriers. The larger, more complex, and more expensive the asset, the harder it is for incremental competitive supply to emerge. Offshore drilling assets fully meet these criteria: taking Noble's Invincible drilling rig as an example, its platform height exceeds 200 meters (equivalent to two Boeing 777s stacked), its drilling depth surpasses 12 kilometers (deeper than the Mariana Trench), and its construction cost in 2014 was $650 million, requiring two years to build at Daewoo Shipbuilding in South Korea.
The industry currently faces high newbuild costs, significant consolidation, and asset stranding risks, resulting in incentive prices (day rates) higher than in previous cycles. Key data points include:
Industry Structure Comparison:
| Metric | Current | Pre-GFC |
|---|---|---|
| Number of Major Owners | 7 publicly listed companies | Over 20 |
| Floating Rig Scrapping Rate | 60% | - |
| Newbuild Orders | Near zero | Active |
The author notes that only Transocean and Shelf Drilling avoided bankruptcy restructuring, and Transocean, as the most indebted company, is most likely to prioritize profit and free cash flow maximization. Management maintains capital discipline due to the "scars" from the previous cycle, and with newbuild costs rising sharply, behavioral incentives are significant.
Given uncertain oil and gas demand outlooks and ESG agendas, management demands shorter payback periods to balance asset stranding risks, placing the burden of proof for new supply squarely on the demand side (oil and gas companies). In comparison, onshore investments have an average payback period of just 1-2 months, requiring only short-term oil price judgments; even lower-cost shallow-water projects require multi-year demand forecasts. Since 2014, most offshore activity has been concentrated in the shallow-water jackup rig market, where Middle Eastern national oil companies (NOCs) account for approximately 70% of customers, due to their exceptionally long investment horizons. Although Schlumberger mentioned in its recent earnings call that offshore final investment decisions appear to be gradually increasing, the author believes the market is far from a "frenzied" demand scenario.
The report clearly favors the offshore drilling sector, arguing that supply constraints, industry consolidation, and capital discipline will drive higher day rates and improved profitability. However, it is important to note that this is a position-holder's perspective—Hosking Partners holds approximately a 2% position in this sector, and its analysis may contain elements of self-reinforcing narrative. Readers should focus on the actual pace of industry demand recovery and the potential impact of ESG policy changes on asset stranding risks.
The report notes that the number of shipyards globally capable of building new drillships has declined significantly, with Hyundai Heavy Industries estimating that global shipyard capacity has shrunk by over one-third since 2008. Remaining capacity is concentrated in Asia (South Korea, Singapore, China), and South Korean shipyards show limited willingness to restart drillship orders. The author confirms this assessment after a field visit. Additionally, due to customer defaults in the previous cycle causing shipyard losses and current full order books for LNG carriers and other vessels, shipyard capacity remains tight. Transocean stated in its latest quarterly report that newly ordered drillships are expected to take 3-5 years (i.e., 2026-2028) for delivery.
The author quotes Sir John Templeton’s famous saying, “The four most dangerous words in investing are ‘this time it’s different’,” acknowledging that new orders and competitive supply could still emerge in the future. However, calculations show that even under the most optimistic scenario—a day rate of $650,000/day for the highest specification floaters (the highest historical contract price, nearly 50% above current leading levels)—a 15% internal rate of return may not be achievable. The author states: “But even a blue-sky scenario of $650k/day for the highest specification floaters...may fall short of such returns.” Therefore, the author concludes that there is still a considerable distance from the trigger point for new ship orders.
The report acknowledges uncertainty around long-term oil and gas demand but points out that global oil demand hit a record high in 2022, and the stickiness of demand from emerging market development and non-light transportation suggests that the Western consensus on rapid oil demand decline may be overstated. The author believes that moderate demand forecasts are more credible than extreme volatility through 2030. This uncertainty itself limits new offshore supply, reinforcing the capital cycle investment thesis. Meanwhile, the declining breakeven costs and lower carbon intensity of offshore production compared to other methods mean that even if total production falls, the industry may rationalize around offshore output.
The report notes that at day rates of approximately $600,000/day for floaters and $250,000/day for jackups, the sector currently trades at less than 3x EV/EBITDA. Additionally, companies such as Transocean and Odfjell Drilling have completed debt capital market transactions to refinance restrictive debt covenants from post-bankruptcy restructurings, giving management greater capital allocation flexibility and the potential for significant shareholder cash returns.
The author compares offshore drilling rigs to Hermès scarves, Louis Vuitton luggage, and Ferrari sports cars, emphasizing that scarcity determines value. Just as Hermès, LVMH, and Ferrari maintain value by controlling supply, drilling companies’ current disciplined supply behavior is rational. Historical experience shows that as available supply diminishes, securing capacity at any cost becomes more important than price. The author believes that supply dynamics will drive day rates significantly higher, translating into improved profits and free cash flow, ultimately lifting sector valuations.
The report clearly favors the relative attractiveness of the offshore drilling sector in the current upcycle, arguing that supply constraints, low valuations, and financial improvements provide a margin of safety. Institutional bias note: As a holder of positions in this sector, the author’s analogy to luxury goods and emphasis on “this time it’s different” carry a clear tone of position defense. Readers should be aware that the author may underestimate the risk of structural demand decline.
| Instrument | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Offshore Drilling Sector (Overall) | Add | Bullish on supply constraints and scarcity value, expecting significant profits and free cash flow | ~2% of portfolio; current day rates ~$600k/day (floaters), ~$250k/day (jackups); sector valuation below 3x EV/EBITDA |
| Transocean | Hold & Observe | As the most indebted company, most likely to prioritize profit and free cash flow maximization | Avoided bankruptcy restructuring; completed debt capital market transactions to refinance restrictive debt |
| Odfjell Drilling | Hold & Observe | Financial improvement will give management greater capital allocation flexibility | Completed debt capital market transactions |
| Shelf Drilling | Hold & Observe | Avoided bankruptcy restructuring | One of the few rig owners that did not go bankrupt |
| Noble (Invincible Rig) | Not explicitly stated | A typical example of asset-intensive operations, highlighting high entry barriers | Rig height over 200 meters, drilling depth over 12 km, construction cost of $650 million in 2014 |