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Stock Market Mike
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I am a value investor. I like to daytrade and ride stocks upward on good news and earnings beats. 2013 had a lot of those, but 2014 - not so much. I am very new to investing and trading, and got into the market in late 2012 after pretend-investing for a few months, but I have had good luck so... More
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  • Seadrill Makes Higher Lows On Improved Investor Confidence - Charts And Moving Averages
    Summary
    • Seadrill's chart patterns reflect improved investor confidence.
    • Seadrill's solid fundamentals seem to be lining up nicely, as observed by higher contract pricing and day-rates, as the company's story plays out.
    • The upcoming earnings release is the second deconsolidated quarter, making sequential comparisons more relevant.
    • Seadrill has multiple funding/financing avenues. Management seems to value their relationships with debt holders.
    • Oh how things change - a few months of research and chart watching, and I'm diving head first into a stock that I wouldn't touch in 2013.

    Seadrill - The Company

    Seadrill (NYSE:SDRL) is a leading offshore drilling company - best described as aggressive growth, high-spec high-tech, yet its shares are priced at discount rather than a premium. Its UDW (Ultra-Deep-Water) rigs command the highest day rates in the sector, and seem to require the fewest employees to operate. Since their rigs are new, they also have the longest remaining serviceable lifespan - but this has led to the company taking on a high amount of debt to fund the newbuilds, so the company is also described as extremely high leverage. Seadrill has utilized today's record low interest rates to modernize its fleet into to the very latest 6th and 7th generation rigs. Its focus is on Ultra-Deep-Water and Harsh-Environment rigs, which command the strongest day-rates right now compared to other subsectors of offshore drilling, like shallow water jackups. Seadrill has a few older rigs - and only a few - but they are high spec harsh environment rigs, which also command reasonable day rates in today's market despite being 4th and 5th generation.

    Over the past few months there have been dozens of articles posted to SeekingAlpha, covering the company. If you're not familiar with the company, enter the ticker symbol into the search box and go read a couple. Some bearish, some bullish, but more importantly to me - many covering the financials and intricate internals of the company, which I have a weaker understanding of.

    Fun Trading and Power Hedge wrote two such articles. If you don't know much about the company, go read their excellent articles now.

    I primarily invest in tech companies, which makes SDRL a jaunt outside the norm for me, but since I wanted to diversify my portfolio to include some oil exposure, my research has led me to believe that this company is one of the better ones to do it with.

    Today (Aug 11th) I saw a comment from a SDRL long saying that traders would not be helping the stock. I disagree. I want to draw some attention to Seadrill's long term story, upcoming events, what the charts are telling us about investor confidence in the company, and some possible sources that Seadrill could use to roll over debt.

    I'm more into technicals and support/resistance levels than most investors, but I like to keep it simple rather than diving into voodoo chart patterns that hardly anyone understands. My thesis is simple - the most understood chart patterns are the most likely ones for investors to act upon, so the charts will reveal useful bits of info about the psychology and mindset of other investors or traders.

    Seadrill - Chart Patterns

    Seadrill appears to be making a higher lows chart pattern. This is a pattern that is very easy to observe, and many investors (even the ones that don't believe in technicals) check the stock price history to make sure that the trend is their friend. This "technical" can provide valuable insights into what other investors will do at a given level - either supporting the stock and bidding the price higher, or selling the stock and taking profit. Some investors have rules that when a stock crosses the 200 day moving average, they buy or sell their holdings, which can contribute to stock price momentum.

    (click to enlarge)SDRL 1yr Chart

    FreeStockCharts.com is a great site for making sure that the trend is still your friend - I recommend anyone watching for trade-vesting opportunities (investing with a 3-12 month horizon) sign up and track their core holdings.

    Seadrill seems to have shrugged off the two most recent batches of heavy analyst downgrades. The first targeted Seadrill (and other companies within the sector) specifically, while this latest batch has been primarily focused on the sector in general, and Seadrill's competitors.

    Other company charts are not faring so well, returning to the baseline or making new lows. This weaker investor confidence could be due to these other offshore drilling companies facing the monumental task (and risk) of modernizing their fleets over the next decade, as we enter a rising rate environment. Transocean (NYSE:RIG) and Diamond Offshore (NYSE:DO) are two such companies facing that hurdle. Hercules Offshore (NASDAQ:HERO) is another, although it has a much smaller fleet to modernize - unfortunately primarily jackups, which are currently a weaker subsector of offshore drilling, though not the weakest. Seadrill's timing for sourcing debt and modernizing its UDW fleet seems to have been impeccable, with a several year head start.

    Diamond Offshore

    (click to enlarge)DO 1yr Chart

    (click to enlarge)DO 2yr Chart

    I would not bet on traders helping to support these other stocks. DO appears to be caught in a long term downtrend, as evidenced by the distance maintained between the 200 day moving average and its current stock price.

    Transocean

    (click to enlarge)RIG 1yr Chart

    (click to enlarge)RIG 2yr Chart

    RIG fares a bit better, but still appears to be caught in a long term downtrend that it is struggling to break out from, despite delivering superb results in recent quarters.

    Is is likely that the gravity of having to modernize its large fleet (sector-leading, size wise) is finally setting in on investor's minds. I suspect at least one more positive quarter will be necessary before seeing positive momentum in the stock, and it will have to be good enough earnings wise that RIG could modernize ~2-3 rigs per quarter going forward without taking on monumental debt.

    With many dozens of rigs nearing the end of their serviceable life (RIG has roughly 80 of them, though not all are older generations), it could take upwards of 6 years of aggressive spending and solid execution to modernize the majority of its fleet - something that Seadrill has a massive head start on. RIG is by far the cheapest offshore driller, valuation wise - but investors should keep the long term story and trend in mind for any sector when investing (rather than trading), and there has been a distinct shift away from older rigs receiving solid well-priced contracts.

    RIG and DO will have to modernize their fleets at some point - I believe this to be the main overhang of the stocks. Investors will not pay a price premium for an offshore driller that grows earnings by selling off older rigs - by shrinking itself over time rather than growing itself, as SDRL is. RIG has quite a few replacement rigs rolling off the lines in 2014 and 2015, so they are taking the first steps.

    Hercules Offshore

    (click to enlarge)HERO 1yr Chart

    HERO also appears to be caught in a long term downtrend. Its recent earnings were acceptable, but were not enough to turn around its trudge downward. Ever since the heavy analyst downgrades that kicked it under its trend lines, it has maintained a distance - no, a gaping chasm - from its 200 DMA.

    The company is attempting to morph itself into a high-spec harsh-environment driller. It has been aggressively disposing of old rigs and purchasing a smaller amount of newer better ones. These should command reasonable day-rates, but earnings will remain weak for several quarters until this strategy is further along. I view HERO as a 2016 story, though if the market latches onto them in late 2014 or 2015, the stock might see better days before then. "How much lower can it go than $3.15/share!?" Beats me - I have a few dozen HERO 2016 LEAPs and bought a few more now that it's dipped much further - but the charts say I may be throwing good money after bad.

    Ocean Rig UDW (ORIG)

    Ocean Rig UDW, a small offshore driller with a very modern fleet, seems to be caught in a volatile uptrend similar to Seadrill.

    (click to enlarge)ORIG 1yr Chart

    (click to enlarge)ORIG 2yr Chart

    It seems poised to convert its 200 DMA back from resistance into support - time will tell. The lower trend line has thus far acted as firm support, while the upper trend line seems to flip between support and resistance depending on how in-favour the sector is. The stock may have a slight overhang due to its relationship with Dryships (NASDAQ:DRYS) and George Economou.

    (click to enlarge)DRYS Historical Stock Price

    Seadrill - Fundamentals & Upcoming Events

    Since my understanding of finances is more limited than other investors, I pay attention to what I can see and measure - downtime, contract dayrates, and remaining serviceable lifespan of rigs. I pay attention to the long term story, the charts, and check SA analyst articles from time to time to make sure there are no financial bombs lurking. The rest just becomes noise. With Seadrill having the largest most modern fleet, remaining serviceable lifespan need not be discussed - it is not an issue, at least this decade.

    Seadrill has signed yet another contract for one of their rigs (the West Saturn) at a record day-rate. The company seems uncompromising in the prices that their contracts and rigs command.

    Last quarter Seadrill had some unexpected downtime on rigs, which should lead to this quarter having significant sequential improvement, assuming no more unexpected downtime is booked. Expectations may be slightly elevated due to this, but I expect the company's execution to be as solid as usual. This is the first quarter that will be easy to analyze sequentially, as it is the second fully deconsolidated earnings release. I am hoping that investors take it well, but would wait out any dips (with confidence) if they did not.

    (click to enlarge)SDRL 2yr Chart

    Seadrill's conference call for this quarter is taking place on Aug 27th 2014 at 12 noon EST.

    Upbeat guidance, solid results, and changing analyst sentiment (depending on how they take the quarter) could be what is necessary to convert SDRL's 200 DMA back from resistance to support. I am hoping that investors take the earnings release well, as a pop upward would bring technical trade-vesters onto their side, shoving SDRL upward further.

    One Final Chart

    Here's a quick look at how the stocks mentioned have performed since the low point earlier this year (approximately 5 months ago), caused by heavy analyst downgrades. I have included NADL as well, SDRL's partial subsidiary with Russia exposure, which popped upwards upon announcement of the upcoming partnership with Rosneft.

    (click to enlarge)5 month chart - since the dip caused by heavy analyst downgrades - of stocks covered here and NADL.

    Seadrill - Funding Avenues

    Seadrill has multiple interesting funding avenues to roll over debt as needed. They are truly multi-national, and are not constrained to just the capital markets in North America. Europe and other parts of the world are also suitable sources of funding for them. They might even get funding from Russia, if Russia had funding to give. (Their main partner over there - Rosneft - also has significant amounts of debt.)

    Recent actions by Seadrill Management offering and then scrapping a convertible offering left a bit of a bitter taste in some stock holder's mouths. Seadrill recognized the situation that they put some bond holders in, and treated them as first-class investors, honouring the convertible redemption offer even though no new convertible offering took place. Management clearly recognizes that these bond holders may be instrumental in rolling over debt when Seadrill next needs to, and does not wish to burn any bridges needlessly. Not all shareholders agree, but I view their actions as building long-term relationships with debt holders, an essential part of their leveraged strategy.

    Conclusion

    I think the remainder of August and beginning of September will shine light on whether my analysis of Seadrill is correct. The stock will either break the trend lines and force me to re-evaluate (and possibly sell), or will continue its slow climb upward. What the stock will do is anybody's guess, but thanks to the charts and keeping the company's story in mind, I can spot long-term changes in direction more easily.

    Disclosure

    I am long SDRL via hundreds of shares and hundreds of 2016 LEAP call options. I have no investment credentials. Wish me luck.

    -Mike

    Disclosure: The author is long SDRL, NADL, HERO.

    Tags: SDRL
    Aug 20 1:55 PM | Link | 3 Comments
  • UNXL: Don't Hate The Shorts – Hate The Swing Traders.

    Swing Trading is Key

    Oh, and by the way, you should become one of them. (a swing trader) After all, you're the most important person in your investing career, right? You have to look after yourself and your portfolio.

    In the UNXL articles that I've read, I've seen a lot of back and forth stabs and jabs, insults and flames. Some people are absolutely sure UNXL is a fraud, outright calling the bulls fools who'll have all their money taken from them as the stock price dips to worthlessness. Others are absolutely sure UNXL is the best investment story in years - the next AAPL explosive growth story - and they litter on personal attacks against the bears in about four out of five comments that I've read.

    I can't say which is correct, but I can tell you neither the longs nor shorts are your enemy. The shorts already shorted the stock - they are not responsible for the plunge from $40+ to $15. Most shorts were deep underwater, and were unlikely to short even more, lest it grow to some insane percentage of their portfolio on more sensational news. Likewise most longs buying shares on the Kodak news are now deep underwater unless they had firm stop losses in place. They are unlikely to average down unless their initial purchase was rather small. At times it's hard to be contrarian, and this rapid plunge will have rattled nerves enough to keep many longs from buying more shares.

    What's all this prove? Nothing... except that if I just described you in the above paragraph, you are not a swing trader, and you should be. (At least for this stock!)

    UNXL is News Driven

    UNXL is a news driven stock, similar to BBRY. UNXL has no products on the market, and whether it can mass produce UniBoss with high enough yields is still unknown. As such there is no floor to the stock - its price can be wildly manipulated by well timed releases of positive and negative news. Despite what some bulls would have you believe, a secondary offering at $32/share does not validate their technology. They could still fail and drop down to just a couple dollars. The reason the offering succeeded was that the risk/reward ratio was acceptable for the buyers. Likewise, past histories of scammy behaviour and product failures are not a good indicator of how things will play out this time. UniBoss is a different technology - an engineer (or team of them) could fail at designing one product and succeed at another. They might use knowledge of past failures to avoid pitfalls in their newest endeavour. Kodak does also have quite a bit of printing experience, so there should be concerns for the bears that any kinks in the manufacturing process will be successfully overcome.

    So what then do you do? Swing trade it! It's hard to be contrarian, and it's harder yet to go long on a stock that you think will fail, or go short on a stock that you think is the next AAPL - and yet that is what you must do to attain the highest returns. That is what many traders are doing with UNXL right now - buying shares and calls on the lows, only to unload them on the highs - then shorting and loading up on puts on the highs, only to unload them on the lows. I must admit I am guilty of this - but to be fair to both the longs and shorts, I decided to deal only with far out options, rather than actually buying/selling shares and contributing to affecting the price.

    Swing trading like this is easier if you focus on what's important to a news driven stock - news! Lets say I thought UNXL was going to collapse and become a $1/share stock? Do I believe there is more good news around the corner? Perhaps the first shipments to some large OEM like Dell, in a couple months time? In that case, I should be bullish right now, because the news is likely to drive its price upward once again.

    Likewise if everything is looking up - yields are reported to be high, shipments are going out - I should probably go bearish to hedge my bets, since timed articles about the challenges OEMs are facing, or competitive pressures (pricing pressures, or contracts lost to Fuji, ATML, etc.), could lead to the share price temporarily dipping. There will probably also be some very negative reviews about some of the first products released that contain UniBoss, and if Uni-Pixel fails to ship the volume that OEMs demand (even if that's higher than current bull estimates), you can expect their yields to be called into question.

    I am basing that last one on a well timed bearish BBRY downgrade which lowered BB10 sales estimates to just ~150% of what the bulls like Peter Misek were hoping for. (Still ridiculously high and unattainable, yet the downgrade resulted in a ~7-10% dip that very day.)

    Charting agrees - swing trading is key

    Swing trading seems to provide higher returns than going purely long or short for news driven stocks - as long as you don't hit the very last swing before the stock booms upward or drops to nothing. I can't answer that, but I wish everyone well (bears and bulls alike), and end this article with my first attempt at some charting and technical analysis. (Follow it at your own peril!)

    (click to enlarge)BBRY 6 month - Yahoo Charts

    http://ca.finance.yahoo.com/q/bc?s=BBRY&t=6m&l=on&z=l&q=l&c=

    (click to enlarge)UNXL 6 month - Yahoo Charts

    http://ca.finance.yahoo.com/q/bc?s=UNXL&t=1d&l=on&z=l&q=l&c=

    One final note on BBRY

    I realize the above BBRY chart looks very predictable, and might spur readers to purchase shares, so I'd like to issue a word of caution - I am concerned about comments made by BBRY CFO Brian Bidulka during the last conference call.

    "In terms of our outlook, the company will be increasing its marketing investment in the global launch of Blackberry 10 during the first quarter by approximately 50%. Including this increased spending, the company believes it will still approach breakeven financial results in the first quarter, based on its lower cost base, more efficient supply chain, and improved hardware margins."

    BBRY currently has a floor, put there by a few positive quarters with no cash burn. It has touched $13.50 over and over and bounced off it to $16. Although ramping up production and higher marketing spend are good things in the long term, I am worried about how the bears will spin it on that day. (June 28th) I fear that without awesome sell-through numbers, BBRY's stock may finally crash through the lower range of its floor.

    The FOMC policy meeting (talks about the future of QE3) also take place roughly a week before (June 18th/19th), which may put share prices under some pressure even before the earnings release. Because of this macro event and the forward guidance given, I am less than certain the pattern will hold.

    Disclaimer: I am a novice investor with between 6 and 9 months of investing experience. I just started learning about technical analysis this month. My intent with this article was to get UNXL longs and shorts to think about a different way to play this stock, which they need to be aware of even if they choose not to join in. It is clear to me that neither the pure bulls nor pure bears can control UNXL's price at all times, as large numbers of people and funds are already swing trading it. In my opinion you may as well join in.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I buy and sell UNXL and BBRY calls and puts. I trade the stocks that I write about and related stocks.

    Jun 05 12:08 PM | Link | Comment!
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