Following the article on the offshore drilling industry trends in 2017, I share my views on individual stocks at the beginning of this year.
Atwood Oceanics (NYSE: ATW)
Atwood Oceanics is now in the spotlight following the news on equity issue (I commented on this topic here). The price of the equity issue is yet to be determined, but, regardless of the price, I expect that Atwood Oceanics will be one of the most volatile offshore drilling stocks in 2017.
Backlog problems are real and cannot be ignored. The equity issue will improve the debt situation, but one could not have said that debt was the biggest or most urgent problem for Atwood Oceanics. Indication in the recent company presentation that Atwood Oceanics will likely find a one-year work for one jack-up is not sufficient enough to provide much upside.
At the same time, the huge short interest makes the stock prone to short squeezes on every major oil move to the upside. In case oil manages to break through $55 for WTI (NYSE: USO) and $57.50 for Brent (NYSE: BNO), Atwood Oceanics shares would be the top candidate for a short squeeze play.
In case oil fails to rally, Atwood shares will be under pressure. Despite the equity issue, time is still playing against the company which has to convince the market that it will be able to find the work for its rigs.
Diamond Offshore Drilling (NYSE: DO)
Slowly but surely, Diamond Offshore Drilling shares attracted significant short interest. Diamond Offshore Drilling is generally out of the news as the company cold stacks its rigs immediately after they go off contract. This means that at any given time, all rigs in the active fleet are working while the cold stacked fleet won't come back for several years.
Time will tell whether this is a wise approach. Meanwhile, Diamond Offshore Drilling shares are trading in a very wide $15 - $25 range. Given the absence of real news, the company's valuation mainly depends on the price of oil and market's perception of offshore drilling as an industry. In my view, the increased amount of shorts in the float makes Diamond Offshore Drilling a potentially interesting short squeeze play, especially at the lower end of the wide range.
Ensco (NYSE: ESV)
Ensco started this year on a positive note. The company's exposure to the jack-up segment surely provided support as oil held above $50 at the beginning of this year. At the same time, I still don't see Ensco breaking the $12 level without a corresponding breakout in the oil market.
Potentially, Ensco will be one of the biggest newsmakers this year due to the size and the composition of its fleet.
Noble Corp. (NYSE: NE)
Noble Corp. shares also gained significantly since the beginning of the year. The post-OPEC trading action showed that the stock is very quick to correct without additional support from outside factors, and I suspect that without a breakout in oil prices, Noble Corp. will quickly return closer to $6.
In my view, the main problem for the stock remains the same - the absence of the differentiating upside catalyst.
North Atlantic Drilling (NYSE: NADL)
North Atlantic Drilling shares are most likely in a sleep mode up until the announcement of the details of Seadrill (NYSE: SDRL) restructuring. I don't expect that anything material will happen and North Atlantic Drilling shares remain an avoid for investors and traders alike.
Ocean Rig (NYSE: ORIG)
Ocean Rig shares traded in a very tight range since the announcement of the third quarter results, which indicated that bankruptcy was still a possibility for the company.
Frankly, I expected more volatility, which could still come should Ocean Rig break above $1.90 and trigger buying from momentum traders. If this does not happen, the upcoming restructuring will weigh on the company's shares and they will likely slide closer towards 2016 lows, which were reached after the first mention of restructuring and bankruptcy in the quarterly report.
Pacific Drilling (NYSE: PACD)
Pacific Drilling is another "no-touch" stock in the industry. The fundamental situation remains hopeless, so we can just wait for the company's fourth quarter report and the subsequent earnings call, when it will hopefully provide some more color on restructuring potential and the company's future plans.
Rowan (NYSE: RDC)
Not much happened in Rowan shares after the bond offering and the subsequent tender offers. Together with the previous Saudi Aramco deal, this put Rowan firmly at the top of the industry. The leader status may ultimately provide more support for Rowan shares, although lately the short interest has often been the biggest driver behind driller's reaction to oil upside or other positive news.
Transocean (NYSE: RIG)
Transocean could be another candidate for an equity offering. The example of Atwood Oceanics shows that there is demand for drillers' shares right now, and Transocean may use the stock's recent gains to fortify the balance sheet. The company has recently done two financing deals involving its new drillships and may do similar deals in the future, but an equity offering is still a possibility as it provides more room for maneuver without using debt.
Seadrill Partners (NYSE: SDLP)
Just like North Atlantic Drilling, Seadrill Partners remains a sleepy stock and will remain such until the results of the Seadrill restructuring are announced.
In my article that was published prior to Christmas and New Year holidays, I stated that Seadrill will gradually slide before the restructuring date. In my view, this slide has already started and I expect to see the stock a bit lower in the coming weeks, especially if oil continues the downside that it tries to develop in the last few days.
The start of the year was obviously better for higher quality offshore drilling stocks. More speculative stocks generally did not share the enthusiasm of the beginning of this year. The key factor before the earnings season for drillers starts is the price of oil. In my view, all offshore drillers, and especially speculative ones, need higher prices to keep the upside momentum.
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.