Transocean - Slick Investment Or Oil Slick?

| About: Transocean Ltd. (RIG)
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Summary

Fibonacci retracement plus price support level established back in October, suggest that the descending channel will soon be broken.

RIG has outperformed the GICS Oil & Gas Drilling subindustry over the last year by a wide margin, +7% to -12%.

RIG is outperforming its peers on almost every fundamental metric, including Price/Cash Flow, Return on Investment [ROI] and margins.

The long-term picture for RIG will be totally dependent on the price of oil. There are some macro-economic factors that may play into the bigger picture.

My suggestion is to buy RIG now at ~$11.18 with a stop loss of $9.00. This trade comes with a high level of risk.

Is Transocean Ltd. (NYSE:RIG) a 'slick investment' or an 'oil slick'? I must admit, I have been struggling with this question for some time. But after a lot of soul searching, I'm declaring the stock a slick investment for a number of reasons that I will get into shortly.

This is a difficult article for me to write, because RIG is one of those companies that amplifies the psychology of trading. My emotions tell me to play the trend and short, short, short, ... But my brain is telling me the opposite, to 'stick with the game plan'. When I wrote my March article on RIG, I stated 'Investors should avoid RIG until the stock price drops below $12'. My thought was to get in at a lower price. Well, RIG has been below $12 for some time now and it is now time to put on the blinders and go for it. Investments always come with risks, the bigger the risk, the bigger the payoff. So going long on RIG should result in a pretty good payoff, right?

Technicals

RIG reached an intraday high of $16.16 back on Jan 12, 2017. Since then the stock price has been falling in a steep descending channel with a (hopefully) final exhaustion breakdown of $10.03 on May 4, 2017, before recovering to a recent $11.17.

OK, if you are a Fibonacci lover, then you will recognize this key ratio: $10.03 / $16.16 = 0.62. This is almost bang-on the golden ratio of 0.618, where resistance should be expected and marks a possible turning point.

Descending channels are invariably broken at some point in time, and the Fibonacci retracement plus price support level established back in October, suggest that the descending channel may soon be broken.

Data Source: Quote Media, Charting Tool: MS Excel

It should also be noted that RIG has outperformed the GICS Oil & Gas Drilling subindustry over the last year by a wide margin, +7% to -12%. While this is history, it is reflective of RIG's management over the last year and fundamentals relative to its peers.

Source:Portfolio123 (Affiliate link)

Fundamentals

RIG is outperforming its peers on almost every fundamental metric, including Price/Cash Flow, Return on Investment [ROI] and margins as shown in the table below.

Source: Portfolio123

Sentiment

The average analyst recommendation for RIG is 3.2 on a scale of 1 to 5 with 1 being a strong buy and 5 being a strong sell. A rating of 3.2 suggests that analysts rate RIG as a Hold. The short interest as a percentage of float is a very high 17.3%. The high short interest and poor analyst rating make RIG an interesting contrarian play. Positive price movement could result in a short squeeze, not unlike the +8% price gain experienced a few days ago on May 6, 2017.

Source: Portfolio123

Macro-Economics

The long-term picture for RIG will be totally dependent on the price of oil. There are some macro-economic factors that may play into the bigger picture. These include:

  • Summer or driving season tends to draw down oil stocks in the U.S.
  • Extension of OPEC cutbacks will eventually reduce oil stocks in Europe / Asia
  • Political and financial issues will likely result in a continuation of the trend in reduction in Venezuela oil exports
  • Fracking has a high depletion rate and at some point in time the rate of oil production will decline or at least be unable to keep up with growing demand for oil.

Suggested Strategy

My suggestion is to buy RIG now at ~$11.18 while setting a stop loss at $9.00. The position should be reviewed on a regular basis, adjusting the stop loss as necessary.

Trade Risks

RIG and other companies in the Oil & Gas Drilling Services Subsector are essentially depreciating assets. The longer the price of oil stays at its present level, the greater the risk involved with holding these companies. Recession in the U.S., China or Europe could cause further decline in the price of oil, resulting in almost certain stock price decline.

Wrap-Up

Fibonacci retracement plus price support level established back in October, suggest that the descending channel will soon be broken. RIG has outperformed the GICS Oil & Gas Drilling subindustry over the last year by a wide margin, +7% to -12%. RIG is outperforming its peers on almost every fundamental metric, including Price/Cash Flow, Return on Investment [ROI] and margins. The long-term picture for RIG will be totally dependent on the price of oil. There are some macro-economic factors that may play into the bigger picture. My suggestion is to buy RIG now at ~$11.18 with a stop loss of $9.00. This trade comes with a high level of risk.

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.