OPEC meeting approaches and the oil (NYSE: USO) market is nervous. As a result, offshore drillers' shares are under serious pressure today. I decided to share some thoughts on the topic right ahead of the meeting.
1. Everyone will be much better off ignoring all the noise before the official results of the meeting are announced. We have seen a lot of various leaks in recent days, and all came from supposedly reliable "sources". In many cases, such leaks are pure disinformation or an attempt of some negotiating countries to influence the position of other participants of the meeting. Short-term traders will, of course, have to follow all the noise but all others are absolutely not obliged to take any decisions based on rumors. In time of chaotic trading decisions the only winner is your broker.
2. In case you missed it, check my latest article on why Russia will not cut oil production. I've written on this topic several times but, judging by some replies in the comment sections, further clarification is necessary. In short, Russia will not cut oil production because of the harsh climate and fear that some wells will never come back after the cut. Russia will continue to support any agreement verbally.
3. Drillers with company-specific catalysts will be the less hurt in case of a meeting's failure. I expect that Seadrill (NYSE: SDRL) and Ocean Rig (NYSE: ORIG) might be more resilient to the downside in case of oil price decline after the OPEC meeting. The reason for this thinking is that players will still be focused on the upcoming restructuring of Seadrill and the upcoming third-quarter report of Ocean Rig.
4. The same companies (Seadrill and Ocean Rig) might enjoy good momentum in case of oil price rally as a positive shift in the oil price environment will make their lives easier. Seadrill will have a better position in negotiations with creditors and Ocean Rig might also improve its position when talking to its lenders. I am sure that both companies need a significant and sustainable upside in oil prices to improve their fortune, but the market will be focused on short-term implications and these stocks may enjoy a momentum rally.
5. Atwood Oceanics (NYSE: ATW) is the first candidate for a long momentum play in case of the positive result of the meeting. The reason for this is a huge short float. Fundamentally, the situation will remain tense for Atwood Oceanics anyway due to backlog weakness. 6. Negative news from the meeting could send Noble Corp. (NYSE: NE) shares back to yearly lows. The short float is still not significant enough to drive a short squeeze, and the stock lacks specific catalysts which could protect it from downside in the negative scenario.
7. Transocean (NYSE: RIG) could be the most stable stock in the case of a negative scenario as the company won support from investors with its recent actions and is basically trading in a wide but flat range.
8. Diamond Offshore Drilling (NYSE: DO) will likely be sensitive to both positive and negative results of the meeting due to its exposure to the floater segment. Fundamentally, I like the balance sheet and the management team.
9. Rowan (NYSE: RDC) is my favorite going into the meeting. The recent deal with Saudi Aramco is a breakthrough and the company's exposure to the jack-up segment means that it will be the first in line when the market recovers.
10. Ensco (NYSE: ESV), which also has a significant jack-up presence, might be a big winner from the positive outcome of the meeting as it might mean almost immediate short-term work.
November 30 will be a very important day for the industry. Trading might be choppy. Fundamentally, the industry badly needs a production cut from OPEC which will lead to higher oil prices. Even in this case, sustainable price upside is not guaranteed due to the existence of the U.S. shale companies, which will be quick to hedge their production and drill more wells. The negative outcome will lead to a large sell-off across the board. In this scenario, my bet will be on Seadrill to tolerate the dip better than others due to the focus on the upcoming restructuring.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the abovementioned stocks.