Yesterday, I outlined my thoughts ahead of the OPEC meeting. Now when OPEC has finally agreed to a production cut, it's time to check what's happening and compare it with initial estimates.
1. Oil (NYSE: USO) rallied massively ahead of the decision on leaks of successful agreement. This time, leaks proved to be true. I would like to highlight two things. The first one is Indonesia's decision to leave OPEC. The agreement would have been even stronger with all members remaining in the organization, but the cut is a very significant achievement anyway. The second thing is Russia's supposed decision to cut production by 300,000 barrels a day. This topic was mentioned during the OPEC press conference and the answer was that Russia was going to cut instead of a freeze. I don't see how it will be done in winter and I continue to believe it's more PR than reality.
2. Transocean (NYSE: RIG) will try to break the high end of the range at $13 in the coming days. The recent financing deal together with upside in oil are sufficient catalysts for this. However, further upside in oil is necessary for a successful break. While the optimism in oil was huge, oil remains below its technical resistance levels for both WTI and Brent (NYSE: BNO) at the moment of writing. Ahead of merger, Transocean Partners (NYSE: RIGP) was moving in sync with Transocean.
3. OPEC's decision is especially positive for a high short-float stock like Atwood Oceanics (NYSE: ATW).
4. No big action in Ocean Rig (NYSE: ORIG) and, arguably, Seadrill (NYSE: SDRL) so far. It's likely that the market is focused on the upcoming restructuring for Seadrill and Ocean Rig's third-quarter report. Seadrill Partners' (NYSE: SDLP) upside was also muted despite the fact that the company is seemingly not a part of Seadrill's restructuring.
5. Not surprising, the outcome of the meeting was good for stronger stocks like Rowan (NYSE: RDC), Diamond Offshore Drilling (NYSE: DO) and Ensco (NYSE: ESV). Rowan remains my favorite in the short-term, and I continue to view Diamond Offshore as one of the leaders of the industry.
6. Nothing spectacular in the most troubled stocks Pacific Drilling (NYSE: PACD) and North Atlantic Drilling (NYSE: NADL). The problems in these two companies are too big to attract enough buyers even after the OPEC deal.
I like the strongest companies - Rowan, Ensco, Transocean and Diamond Offshore. Technically, Transocean and Diamond Offshore are yet to overcome their respective resistances, which might become a problem if oil does not move higher and break to $55 per barrel. OPEC's decision is certainly positive for the market and stocks may continue to rally for a while. However, it's important to remember in this euphoria that $50 oil is not enough to produce a sufficient number of new contracts for the industry. If oil fails to continue its rally, all offshore drilling stocks will fall hard.
Disclosure: I am/we are long ESV, RDC.
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.