This year, we have twice recommended short-term positions in Noble Corporation (NE) on attractive bullish divergences (most recently on April 2). While the expected bounce did occur, it was short lived and, once again, NE stock is falling along with its peers.
On the one hand, oil prices have stabilized and even risen this year, which has helped put a floor under the stock. Shipping costs for VLCC (very large crude carriers) have risen, and growth has declined much less in North America and Asia than originally expected. These factors should all help support oil prices in the short term.
However, on the other hand, the moderate improvement in the fundamentals are actually likely to work against NE in the near term. We would consider NE stock, and many of its peers, as more likely to underperform the rest of this year than otherwise.
From a technical perspective, trendline resistance (most recently near $18 per share) in more than intact and was retested multiple times in May. As you can see in the next chart, NE stock is now below short-term support and is likely heading towards its descending trend-line support level under $12 per share.
Noble Corporation (NE): Chart Courtesy of eSignal
A perfect storm of fundamental issues have plagued NE and its group recently. While higher oil prices can help to keep the stock at support, flat or slightly rising prices can also keep it channel-bound. Our original premise for this trade may help shed some light on why NE stock is stuck between a rock and a hard place from a fundamental perspective.
Deep-water drillers and services firms are capital intensive. This is good if oil prices are very high and companies are rushing to market and willing to pay a premium for NE’s services. However, because this work is so capital intensive, flat to slightly rising oil prices also create an incentive to keep existing operations running, even if margins are narrow and flat. It’s cheaper to keep things running for now than to shut them off and have to restart or rebuild later.
Oil prices that are high enough to justify existing drilling and pumping operations unfortunately help to sustain the current glut of production from offshore facilities. That supply will keep a lid on prices and, in the longer-term, reduces expected demand for services from companies like NE. For example, if oil rigs aren’t being shut down, they aren’t going to need to be “turned back on,” which is where NE would benefit.
At this point, barring an unexpected spike in oil prices that can absorb the current overproduction in offshore operations, we believe NE stock will remain within its descending channel. This may be an opportunity for a bearish trade. However, we would suggest that shorts concentrate on NE’s peers who are less fundamentally sound and more leveraged than NE. Companies that fit that profile should suffer much more from flat oil prices and rising interest rates.
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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