The collapse in oil prices hurt everyone in the industry, but, eventually, prices will rebound. Assuming prices had found a bottom in December, we suggested the NE stock trade because rebounding production would create a lot of demand for oil-services firms.
Since that time, falling oil prices have put pressure on the stock, reduced the company’s backlog and helped create a very small-percentage earnings miss in February. However, we think the original argument in favor of the trade is still valid. The breakout may have been delayed, but there are early signs of rising momentum that could materialize in the second quarter.
Because so many firms were in a precarious capital position due to the decline in oil prices, production assets have been rapidly pulled offline. However, oil prices are volatile, and this isn’t the last time it we will experience unusual volatility.
The selling has been overdone in the short term and Chinese stimulus and expected growth in 2015 will drive prices higher over the next few quarters. Bringing those assets back online is expensive, and companies that are struggling now will want to move quickly to ramp up production.
This action is likely to be very good for services firms in the sector like Noble, that have been — somewhat unjustifiably — beaten down like the rest of the group since mid-2014.
Unlike many of the shale companies in the U.S. that operate as highly leveraged partnerships or regular C-corps, Noble Corp still has an attractive capital position. That means NE stock missed out on some of the speculative windfall over the last few years, but it also means that it can afford to swoop in and ramp up production when energy prices start to recover.
As you can see in the chart above, the original divergence we were monitoring ran out of steam before breaking resistance at $20 per share. However, from a technical perspective, the lower lows have continued to lose momentum, and the rally we expected in NE stock still seems likely.
We still like NE stock for speculative bullish entries in 2015 for the same reasons we liked it at the end of the fourth quarter in 2014. However, uncertainty around the ongoing Iran talks should encourage additional caution.
A conditional entry on a break above $16 is most attractive, with an initial target just under $20 per share. If a new trend emerges, as we expect, then our initial upside estimate of $26-$28 per share of NE stock should be considered a secondary target in the near term.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
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